Question 1 (25 marks) Nick and Inna are newlyweds and are looking to purchase their first home. Nick is 28 and Inna is 30. They would like to purchase a home in 2 years. The house they are looking at will cost $680,000.

Nick earns $95,000 gross p.a. and Inna earns $60,000. They figure that moving and legal expenses will cost $10,000. Taxes on the property are $6,000 p.a. They have no children but plan on having kids in the near future. They are currently saving $12,500 p.a. They plan to make the minimum down payment required to obtain a conventional mortgage. Current stated mortgage rates are 4%. They will choose an amortization period of 20 years. They receive a return of 7% on their investments. Nick’s marginal tax rate is 45% and Inna’s is 30%. Inflation is 2%. Their balance sheet is as follows: Assets: Cash $1,500 Investments $82,300 RRSPs $13,000 Two cars $80,000 Personal Items $27,000 Liabilities: Credit Cards $4,650 Car Loans (combined total) $52,000 Total monthly car loan payment is $1,500. Monthly credit card payment is $350. a) What will their monthly mortgage payment be if they buy the home? (3 marks) b) Will they qualify under usual bank rules? (3 marks) c) Assuming they qualify, will they be able to afford the monthly mortgage payment based on the information provided? Assume Nick’s tax home pay is $55,250 after taxes and deductions and Inna’s is $42,000. (4 marks) d) They did indeed receive the mortgage and now 5 years have passed and they would like you to provide them with some information prior to re-financing. They would like to know the following: i) What is the outstanding balance of the mortgage after 5 years? (1 mark) ii) How much principal did they pay down? (1 mark) iii) How much interest did they pay? (2 marks) iv) Their new stated rate is 6%, what is the new monthly payment? (2 marks) e) How would you recommend they should save for and finance the down payment? (3 marks) f) Comment on current mortgage rates in the market. Based on your findings what type of mortgage would you recommend for Nick and Inna? Why? (6 marks) Question 2 (17 marks) Mark and David are deciding if it is the right time to purchase a condo and have come to you for your advice. They currently have $50,000 saved up for a down payment. The condo would cost $230,000. They only want to live there for 5 years before upgrading. Their mortgage interest rate would be 3.20%. They would amortize the mortgage over 25 years. Other costs with owning the condo are as follows: $2,250 p.a. for property taxes; $1,500 p.a. for insurance and a monthly maintenance fee of $900. They currently rent the main floor of a Victorian house close to downtown Toronto and pay $1,650 a month. When they came to you previously for investment advice you offered them a return of 4% p.a., which has not changed. They expect all expenses as well as home values to increase at a rate of 2% p.a. Is it a good time for them to buy? Ignore moving expenses and legal costs. (12 marks) What other factors should they consider? (5 marks) Question 3 (13 marks) Peter has heard about all these perks credit cards provide but his existing one does not provide any such perks. He decides to apply for a new card and is unsure between M.P. Platinum and A.G. Gold. His average month end balance is $850 which he pays on the due date. He does not own a car as he prefers the efficiency of public transit, but does rent one for about 7 days of the year. He keeps his cash reserves in a high interest savings account which pays 2% p.a. The cards offer the following: M.P. Platinum A.G. Gold Grace Period 19 days 25 days Rebate on purchases 1% paid at year end 0.5% paid at year end Annual Interest 19.99% 22% Collision damage waiver NO YES (Car rental agencies charge $25 a day for such coverage) Fee $50 $100 a) Which card should he choose? (8 marks) b) He decided to choose M.P. Platinum because it has a nicer design. On November 1st he made a $200 purchase and did not pay the balance when due. If he only makes the minimum payment of $10 per month how long will it take to pay off the entire amount? How much will he end up paying for the $200 purchase over this time period? (5 marks) Question 4 (15 marks) Winnie would like to purchase a car in 2 years. She wants an Audi that will cost $60,000. She has $35,000 set aside at the moment and is unable to set aside anything else. Her bank offers a rate of 3% p.a. on an investment loan and for all other loans offers a rate of 4.5% compounded semi-annually (for a 5 year term). She expects to be able to earn 5.5% p.a. on her investments. a) Is her return on investment enough for her to purchase the car outright in 2 years? If not, what return is required? (5 marks) b) If she decided to borrow from her bank and invest to make up the difference in order to be able to pay for the car in full how much should she borrow? (5 marks) c) What are some considerations she should take into account for each option? (5 marks) Question 5 (30 marks) Pauline and George, age 32 and 35 respectively, have been working for the same bank for the last eight years. When their baby girl, Nancy, was born recently, they decided that Pauline would switch to work part-time because it would cost at least $15,000 per year to hire a domestic worker to care for the baby and helping out in cooking. Her income, however, will fall to $25,000 per year. George earns $75,000 per year with good company benefits. They expect that their income will increase at the rate of inflation, expected to be 2% per year. If one of them dies, the remaining family will need 80% of their current expenditure of $60,000 per year to maintain the same life style. George does a lot of things in house maintenance, repair, mowing the lawn, shovelling snow etc. He estimates that doing all these things himself has saved the family at least $5,000 per year. They are both non-smokers in excellent health. They intend to retire at 65. The nominal rate of interest is 7%. Assume a rule of thumb adjustment factor of 75%. Required: a) Using the Income Approach, calculate the amount of life insurance that the family needs. (12 marks). b) Using the quotation table (Table 10.2) for ten-year term insurance, calculate the annual premium for the family. (6 marks). c) Using the Expense Approach, calculate the amount of life insurance that the family needs. (12 marks).