Mid-term test 1- 4099 2009 solution

Mid-term test 1- 4099 2009 solution - FACULTY OF BUSINESS...

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L L A K E H E A D U U N I V E R S I T Y F ACULTY OF B B USINESS A A DMINISTRATION Business 4099 WA PERSONAL FINANCIAL PLANNING MODEL SOLUTION Mid-term Test # 1 K. Hartviksen February 12, 2009 Value (5) 1. Explain the meaning of the following terms as they are used in this course: Power of Attorney is a legal document that delegates control of your financial affairs to a designated person in the case of your incapacity to manage those affairs. (page 13 of KPMG) Fiduciary relationship is a legal concept that arises when one person or institution owes a particularly high duty of care in dealing with a client’s affairs. (page 564 of Ho and Robinson text) KYC is the “ know your client” rule. This rule is the focus of most compliance regulation in the financial services industry. It focuses on the ‘suitability’ of the advice given to a client. Of course, suitability can only be achieved if the advisor fully understands the client in terms of their investment knowledge, willingness and ability to carry risk; investment time horizon; tax preference, etc. (discussed thoroughly in class) Power Asymmetry is the difference in the ability of the client to defend his interests and the planner to resist control. A small client who has suffered a loss due to unethical behaviour will have a very difficult time successfully prosecuting a major financial institution. GAAR general anti-avoidance rule. The Income Tax Act provides a GAAR applicable to all transactions. It applies in situations where existing rules do not apply specifically, but overall is considered a misuse or abuse of the Income Tax Act. (As discussed in class) (6) 2. It is 2009. Your client plans to retire in 20 years. Your client is expected to live for an additional 35 years after retirement. Your client wishes to enjoy the same level of income in current dollars as they enjoy today. Today their monthly gross income is $5,000. Assume for forecasting purposes that the client should be able to earn a nominal rate of return on their investments during the asset accumulation phase of their life of 5 percent, and a nominal rate of return during their retirement years of 5 percent. Assuming an inflation rate of 2% during the forecast period: a. What sum of investable funds must the client accumulate by their retirement date to offer a 35 year fixed term retirement annuity of $5,000 per month in current dollars? (Be sure to show your work.) b. How much will your client need to save each month (in current dollars) during their working years in order to accumulate that sum (found in part a) if they currently have no savings and they will start to save one month from now? (Be sure to show your work.) c. Explain how you adjusted your discount rate in order to account for inflation.
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