An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday $ 800 Second birthday $ 800 Third birthday $ 900 Fourth birthday $ 900 Fifth birthday $ 1000 Sixth birthday $ 1000 After the child's sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $350,000. If the relevant interest rate is 10 percent for the first six years and 7 percent for all subsequent years, is the policy worth buying?

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
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ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
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Chapter8: Insuring Your Life
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An insurance company is offering a new policy to its customers. Typically the policy is bought by
a parent or grandparent for a child at the child's birth. The details of the policy are as follows:
The purchaser (say, the parent) makes the following six payments to the insurance company:
First birthday $ 800
Second birthday $ 800
Third birthday $ 900
Fourth birthday $ 900
Fifth birthday
$ 1000
Sixth birthday $ 1000
After the child's sixth birthday, no more payments are made. When the child reaches age 65, he
or she receives $350,000.
If the relevant interest rate is 10 percent for the first six years and 7 percent for all subsequent
years, is the policy worth buying?
Transcribed Image Text:An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday $ 800 Second birthday $ 800 Third birthday $ 900 Fourth birthday $ 900 Fifth birthday $ 1000 Sixth birthday $ 1000 After the child's sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $350,000. If the relevant interest rate is 10 percent for the first six years and 7 percent for all subsequent years, is the policy worth buying?
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