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Given the recent market volatility, you are thinking to buy

Customer Question

Given the recent market volatility, you are thinking to buy an annuity product from AFlex after getting your year-end bonus. Currently, AFlex is offering the following three annuity products, BetterLife, EnjoyLife, and LongLife. BetterLife is expected to pay $200 a year for the first 5 years, $350 a year for the next 10 years after that, and nothing thereafter. EnjoyLife is expected to pay $300 a year for the first 10 years, $200 a year for the next 5 years after that, and nothing thereafter. LongLife is expected to pay a growing amount every year forever, starting in the sixth year, it will pay $150 and that amount will grow at a 1% per year. The expected returns for BetterLife, EnjoyLife, and LongLife are 5%, 4%, and 5%, respectively. (a) What would you be willing to pay for each annuity? If they were traded in a market, what would be their market prices? (b) If all the three annuities are traded at the market prices calculated above, which investment do you prefer? Explain. (c) If all three annuities are sold for $2,900, which annuity should you buy? (d) If the expected returns of the three products are now all equal to 4.5%, which product is most sensitive to interest rate change, and why?