Author Question: The premium on a life insurance policy is A) a special service charge for monthly rather than ... (Read 55 times)

D2AR0N · **on:** Jul 11, 2018

The premium on a life insurance policy is

A)

a special service charge for monthly rather than annual payments.
B)

a reimbursement for previous overpayments.
C)

the amount paid out at death minus tax payments.
D)

simply the periodic amount paid to the insurance company.

Question 2

Michael received a professional baseball contract paying 7,000,000 for 5 years, Bert received a two-year contract for 16,000,000 per year. For purposes of calculations, treat these contracts as ordinary annuities.

What are the present values of each contract if we assume a discount rate of 6? It is not clear that the higher present value is the preferred contract in this situation. What other factors might you consider when determining which contract has greater value?

macybarnes · **Reply #1 on:** Jul 11, 2018

Answer to Question 1

D

Answer to Question 2

Bert = 29,334,283, Michael = 29,486,547. What happens to Bert in years 3,4, and 5? If he makes no more money than this is a fair comparison, but if he continues to play professional ball at a high level, then he can expect a fair amount of money in the subsequent three years. Later we will see how financial managers make comparisons such as this.