A customer, age 45, invests $100,000 in a variable annuity contract. It imposes an 8% charge if the contract is surrendered within the 1st 8 years; and a 4% charge if the contract is surrendered in years 9 and 10. Thereafter, there is no surrender charge. The contract has a Guaranteed Minimum Income Benefit (GMIB) that promises to annuitize the account at a value of $180,000 starting at age 60. After holding the contract for 5 years, the separate account has a net asset value of $120,000. The insurance company makes an offer to the client to buy back the contract at $121,000 with no surrender charges imposed. Assuming that the client's investment objectives have not changed, the best advice to the client is to:.

the client should wait 10 more years until the contract is worth $180,000 since he will earn a slightly higher interest rate

Explanation:

we must determine the effective interest earned by the client if he accepts the company's proposal:

future value = present value x (1 + r)ⁿ

121,000 = 100,000 x (1 + r)⁵

(1 + r)⁵ = 121,000 / 100,000 = 1.21

⁵√(1 + r)⁵ = ⁵√1.21

1 + r = 1.0389

r = 0.0389 = 3.89%

if the client waits 10 more years until he is able to annuitize the account, he should earn:

180,000 = 100,000 x (1 + r)¹⁵

(1 + r)¹⁵ = 180,000 / 100,000 = 1.80

¹⁵√(1 + r)¹⁵ = ¹⁵√1.80

1 + r = 1.03996

r = 0.03996 = 4%

in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation:

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