The viatical industry offers a rather grim example of present value concepts. A firm in this business,
Question:
Suppose a patient has a life expectancy of 18 months and a life insurance policy with a death benefit of $100,000. A viator pays $80,000 for the right to the benefit, and then sells that claim to another investor for $80,500.
a. From the point of view of the patient, this contract is like taking out a loan. What is the compound annual interest rate on the loan if the patient lives exactly 18 months? What if the patient lives 36 months?
b. From the point of view of the investor, this transaction is like lending money. What is the compound annual interest rate earned on the loan if the patient lives 18 months? What if the patient lives just 12 months?
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Related Book For
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart
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