Greg puts $10,000 into an equity indexed annuity which allows compounding on gains within the annuity. The product has a minimum guaranteed return of 3% annually. Greg's participation rate is 90% of the S&P 500 index in years exceeding the minimum guaranteed return. There is also a cap of 10% on gains. After 3 years and with no fees taken into consideration, Greg is trying to figure out the value of his equity indexed annuity. Returns were as follows:
Year 1 - 12.5%
Year 2 - -4.0%
Year 3 - 5%
With these returns, Greg should find that the balance of his annuity is approximately which of the following after year 3?
[A] $11,750
[B] $11,840
[C] $12,032
[D] $12,167

Question

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Respuesta :

andromache andromache · Answer 1 · 2020-09-05T03:18:42+02:00

Answer:

[B] $11,840

Explanation:

Given that the $10,000 is put in the equity

Now for the year 1 the return is 12.5% so its 90% would be 11.25 % that exceeds from 10% cap

In year 2, the returns shows in negative so here the minimum return is 3%

And, in year 3, the return is 5% and its 90% is 4.5% that is below from 10% cap

Now

For year 1

The balance would be

= $10,000 × 1.10

= $11,000

In year 2

= $10,000 × 1.03

= $11,330

And, in year 3

= $11,330 × 1.045

= $11,840

Hence, the correct option is B. $11,840