ch.13 - 2010 Reed International Books Australia Pty Limited...

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© 2011 LexisNexis Australia 1 Financial Planning in Australia 4ed – by Taylor, Juchau, Houterman Solutions by Michelle Cull PERSONAL CREDIT, DEBT AND LENDING Chapter 13 Solutions to Questions Question 1: Bradley has $300 in his money box and earns $40 a week from the weekly paper run. He also receives $10 a week in pocket money from his parents. He wants to start saving for a motorbike and decides to open a bank account. He can choose between account A which pays 4% per annum (compounded and paid monthly) or account B which pays5% (compounded and paid annually). How much would Bradley have at the end of the year for each of these accounts, assuming Bradley deposits his $300 plus the money he earns from the paper run each week? This question involves a basic compound interest calculation for the $300 in Bradley’s moneybox followed by an annuity calculation for the regular payments of $40 and $10 per week respectively. Account A (compounded and paid monthly) Compound interest (text p 454) = 300 x (1+ (0.04/12)) 12 = 300 x (1.0033) 12 = 312.22 Annuity = $40 + $10 = $50 per week or 216.67 per month for 12 months @ (0.04/12) ie, 12 periods at 0.0033 Annuity formula: FV = PMT X i (1+i) n – 1 FV = $216.67 x 0.0033 (1.0033) 12 –1 FV = $2648.24 Total Account A = 2648.24 + 312.22 = $2960.46 Account B (compounded and paid annually) © 2011 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Reproducing or distributing any material from this website for any other purpose requires written permission from the Publisher. © 2010 Reed International Books Australia Pty Limited trading as LexisNexis. Ancillary for Financial Planning in Sustralia 4ed - Taylor, Juchau, Houterman
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© 2011 LexisNexis Australia 2 Compound interest = 300 x (1+ (0.05/1)) 1 = 300 x (1.05) 1 = 315 Annuity ($50 per week or 2600 for 1 year @ 0.05 per year) = 2600 x 1.05 = $2730 Total Account B = 2730 + 315 = $3045. Question 2: Patrick and Linda have saved up $65,000 as a deposit on a new home. They can obtain a home loan from their bank as either a standard ‘principal and interest loan’ at 6.5%or a ‘line of credit loan’ at 7%. What things do they need to consider when making this decision? The first thing that they need to consider is how disciplined they will be in repaying the loan. If they believe that they will not be self-disciplined, then they may need the requirement of making a monthly payment. While the interest rate is lower on this type of loan, Patrick and Linda may not have the flexibility to make lump sum repayments to lower the principal of the loan or the ability to make more frequent payments. The interest rate is higher on the line of credit loan and it may increase faster than that on the
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This note was uploaded on 01/10/2012 for the course FINS 3616 taught by Professor Curry during the Three '10 term at University of New South Wales.

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ch.13 - 2010 Reed International Books Australia Pty Limited...

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