Life insurance annual rate

CFA Level I Fixed Income
#1

A life insurance policy in which you make monthly payments of 85 pesos for 20 years (240 periods) has a payoff of 30,600.

What is the annualized rate?

This is where i get confused.

Using the pv functions in the BA plus, i get a monthly IRR of 0.31947663.

To get the annual return should i multiple it by 12? 3.83%

Or raise it by 12
(1.00319477^12) -1 = 3.90%

Thank you.

Ps. When using the CF flow and IRR function
Cf0 = 0
C01=-85
F01= 240
C02=30,600

The IRR is 0.31711702 off by 0.00235962. Should they both equate?

#2

3.83% is the nominal rate compounded monthly; 3.9% is the effective annual rate

For the CF worksheet, this will get you to the same answer:

Cf0 = 0
C01=-85
F01= 239
C02=30,515

:nerd_face:

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#3

So when should someone use the Nominal vs Effective rate?

#4

The question wording should state whether they want a nominal or effective rate. In the CFA syllabus, I think they call the nominal rate the annual percentage rate.

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