Question 1 (2 Marks)

As you are planning your retirement starting precisely 2 years from now, you came across a life-time annuity offer where for a $350,000 purchase of this annuity today, you are entitled to a $2,000 per month payment - at the beginning of each month of retirement - until death (dont be sad this is a fact of life). You expect to live for 35 years in retirement. If the annual interest rate is 6% (EAR), answer the following questions:

1) What is the type of annuity described above? (0.5 Mark)

2) What is the most appropriate rate to use to find the present value of the annuitys cash flows just before retirement begins (exactly 2 years from now)? (0.5 Mark)

3) Would you buy this financial product? Why? Or Why not? (1 Mark)