on-course
09-30-2002, 11:45 AM
Hi everyone maybe you can help me with my confusion about this problem on page 180 of Kellison's book. Here I think he should have made clear the 9% effective rate is for whom.
I thought this person bought the annuity at a low price and then "re-placing" the annual payments from the annuity into a 7% fund. Although the return is lower than 8% he was still able to get 9% on the price he paid for the annuity ("the original investment") because the price he paid was very low.
The book however seems to say that this person borrowed P to buy a 8% annuity but the effective rate on the loan of P he borrowed is actually 9%, higher than the 8%.
Thanks.
I thought this person bought the annuity at a low price and then "re-placing" the annual payments from the annuity into a 7% fund. Although the return is lower than 8% he was still able to get 9% on the price he paid for the annuity ("the original investment") because the price he paid was very low.
The book however seems to say that this person borrowed P to buy a 8% annuity but the effective rate on the loan of P he borrowed is actually 9%, higher than the 8%.
Thanks.