Personal Finance Module 2 Q&A

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School

University of Ontario Institute of Technology *

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Course

3430U

Subject

Finance

Date

Apr 3, 2024

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docx

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Uploaded by DrSummer7456

Chapter 5 1. Benjo has a monthly income of $3500. After taking into account taxes and other deductions, his disposable income is $2,350. He has $740 in net cash flows each month based on his current level of expenses. Benjo has decided to deposit his monthly net cashflows in a savings account. He would like to establish an emergency fund equal to six months’ worth of expenses. Approximately how many months will it take Benjo to reach his goal? Solution Disposable Income = $ 2350 Net cash flows = $ 740 Monthly Expenses = 2350 -740 = 1610 Amount equal to 6 months expenses would be = 1610 * 6 = 9660 The number of months it would take to accumulate 6 months savings would be = Total amount required / Monthly Savings = 9660 / 740 = 13.05 Months 2. What rate of interest did Alberto receive over a period of 67 days if he invested $7444 and received interest in the amount of $157? Solution Principal value = $7444 Maturity value = $7444+ $157= $7601 Days to maturity = 67 days Rate of interest = [(maturity value - principal value)/principal value] x 365 days/days to maturity = [($7601 - $7444)/$7444] x 365 days/67 days = [$157/$7444] x 365 days/67 days = 0.02109081139 x 365 days/67 days = 0.1149 or 11.49% 3. Hamza has recently received a bonus of $5000 from her employer. She is not sure what she would eventually like to do with this money. For the time being she is considering two GIC investment options: a. Invest $5000 in a 2-year GIC that pays interest at 1.65 percent, compounded annually. b. Invest $5000 in a 1-year GIC that pays interest at 1.3 percent, compounded annually, and then reinvest the maturity amount for another year at the same rate of return. SOLUTION

Chapter 6 1. Jack needs to borrow $1000 for the upcoming year. West Coast Bank will give him a loan at 9 percent. East Coast Bank will give him a loan at 7 percent with a $50 loan origination fee. First Canadian will give him a loan at 6 percent with a $25 loan origination fee. Assume that the interest rate on each loan is compounded monthly. Determine the total interest and fees Jack will be charged in each case. Which loan should he choose? SOLUTION W-coast: 1000*9%=90 E-coast: 1000*7% + 50= 120 1 st Canadian: 1000*6%= 85 Therefore, jack should choose the loan from 1 st Canadian. 2. The end of the billing period on Paul’s credit card is the thirtieth of the month. He has a grace period of 21 days. If Paul purchases a stereo for $2300 on June 12, how many interest-free days will he have? When will he have to pay for the stereo in full in order to avoid finance charges? SOLUTION 3. Harry purchased his condo for $330 000 and now the appraised value is $360 000. His outstanding mortgage is $228 000. What is the maximum home equity line of credit Harry would qualify for? SOLUTION NOTE: max HELOC is 80% and min HELOC is 20% maximum HELOC= ($360000 x80 %)−$228000=$60,000 4. Bob bought a new car for $28 000 with a loan that will be amortized over five years. The best interest rate he got from his bank for the loan was 1.99 percent compounded annually. What is Bob’s monthly car payment? How much interest was paid in the first car payment? How much interest will be paid over the entire life of the car loan? SOLUTION

1 ST CAR PAYMENT: (1.99%/12)*28000= 46.43 Chapter 7 1. Isabella and Raphael are interested in buying a home. They have completed the initial steps in the home-buying process, including contacting a realtor and obtaining a pre-approval certificate from their bank. During the process of determining an affordable down payment, they have asked you to determine whether their GDS and TDS ratios are within the guidelines set by their bank. They have provided you with the following information. Isabella earns $35 000 per year, while Raphael earns $30 000 per year. They believe that they could afford a mortgage payment of about $1000 per month. The annual property taxes in the area where they would like to purchase a home average about $1600. Heating costs should be about $125 per month. The couple has an outstanding balance on their line of credit of $15 000. In addition, Raphael has an outstanding balance on his student loan of $10 000. Currently, the couple is making a monthly payment of $450 on their line of credit and $300 on the student loan. Their bank requires that the GDS ratio be no more than 32 percent and the TDS ratio be no more than 40 percent. Do Isabella and Raphael meet these requirements? SOLUTION Given, Yearly income of Isabella $35,000.00 Raphael $30,000.00 Total annual Income of Isabella and Raphael = $65,000.00 Monthly Gross Income = $5,416.67 ( 65000/12) Property Tax $1,600.00 per annum Property Tax per month = $133.33 ( 1600/12) Heating Cost per month = $125.00 Monthly mortgage = $1000 ( Principal + Interest) $2,858.33

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GDS Ratio = PITH / Gross monthly income *100 ( is a measure of housing costs versus a borrower's gross income .) = Monthly Mortgage + Property Tax +Heating Cost / Gross monthly income *100 = ( 1000 + 133.33 + 125 ) / 5416.67 * 100 =1258.33 / 5416.67 * 100 = 23.23% The GDS ratio of 23.23 % is within the maximum limit of 32 %, Hence they meet the requirements of GDS ratio Other Monthly Payment of debts Line of credit $450.00 student loan $300.00 TDS ratio = PITH + Payment of other monthly debts / Gross Income *100 = ( 1258.33 + 450 +300 ) ) c =2008.33 / 5416.67 * 100 = 37.08% The TDS ratio of 37.08 % is within the maximum of limit of 40% , Hence they meet the requirements of TDS ratio 2. Dorothy and Matt are ready to purchase their first home. Their current monthly income is $4900, and their current monthly expenses are $3650. Their rent makes up $650 of their cash flow. They would like to put 10 percent of their income in savings every month and leave another $200 per month in their chequing account for emergencies. How much of a mortgage payment, including taxes and utilities, can they manage under these conditions? SOLUTION Savings of cash inflow = 4900 *10% = 490 Checking account = $200 Other cash other excluding rent = 3650 - 650 = 3000 Net cash remaining post the above = 4900 - (490+200+3000) = 1210 They can manage to pay $1210 mortgage payments under these conditions. 3. A $120 000 mortgage is amortized over 25 years. If interest on the mortgage is 4.5 percent compounded semi-annually, calculate the size of monthly payments made at the end of each month. SOLUTION I/Y = ((1+4.5%/2) ^ (2/12) -1) *100= 0.3715319575%

4. Paul really wants to purchase his own condo. He currently lives in an apartment and his rent is being paid by his parents. Paul’s parents have informed him that they would not pay his mortgage payments. Paul has no savings but can save $700 per month. The condo he desires costs $120 000, and his real estate broker informs him that a down payment of 10 percent would be required. If Paul can earn 6 percent, compounded annually, on his savings, after tax, how long will it take him to accumulate the required down payment? SOLUTION effective annual interest rate = (1+Apr/n) n -1 =(1+6%)^(1/12)-1 = .4867550565% Number of payments in a annuity : = ln(1+{future value*r/payment})/ln (1+r) =In(1+(12000*.4867550565%/700) / In(1+.4867550565%) = 16.51months = 1.4 Years