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York University COURSE ADMS 3541 Summer 2014

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Question;Question;1: Definitions (8 marks);Define;briefly each of the following terms;Income splitting;Adverse selection;Speculative Risk;Comprehensive auto coverage;3;Question;2: Short Answer (6 marks, 3 each);What;does the law of large numbers say and what is its significance in;financial planning?;Briefly describe three income tax deferral;techniques.;4;Question;3: After-tax return (6 marks);Nosheen Aziz bought a bond for $990. It;paid a semi-annual coupon of 4% on the face value of $1,000. In one year it;matured at face value. Her marginal tax rate is 42%.;a) What;was her EAR before-tax? (2 marks);b) What;was her EAR after-tax? (4 marks).;5;Question;4: Alternative Lenders (12 marks);Ayan Roy has trouble with his budget.;His $400 car payment is due tomorrow, but he only has $100 in cash on hand;which he needs for groceries until he gets paid again in two weeks. He knows he;has put himself in a bad situation and is exploring the unsavory options;available to him. He has the following choices for the $400 car payment;1. ?Gracious?;Grady, the local payday lender, charges a flat $12 fee plus interest at 55% EAR;plus 10%*(principal + interest) for a 14 day loan. Gracious Grady promises;?What happens here stays here: no-one ever knows who borrows from me or how;much because I don?t report to anyone. All I need from you is your cheque.?;2. Pawnstar;the local pawnshop, has offered Ayan $400 for his Tag Heuer watch. The loan is;structured so that Ayan gets his watch back if he pays 2% interest plus 18% in;fees in 30 days (he gets no discount if he pays it off sooner). His watch is;valued at over $2000.;3. Ayan?s;friend?s friend?s friend knows of someone who will charge him $100 for the loan;? meaning that he gets $400 now, but then owes him $500 in two weeks. This;?friend? is known around town as Fingerless Freddie, which concerns Ayan just a;bit.;a) Calculate;the EAR for each of the three options. (7 marks);6;a) Identify;specifically one relevant factor or consideration about each one of these;options that was not captured in the EAR calculation. (3 marks);?Gracious? Grady;Pawnstar;Freddie;b);Give Ayan two marks;worth of financial planning advice. (2 marks);7;Question;5: Risk Management and Insurance (28 marks);Melissa;Fernandez and Daniel Gaglia are 55. They have 3 children who are all out of the;house and off on their own and one disabled child who still lives at home with;them (and will always live at home). Their house in Toronto is currently valued;at $1 million and it is almost paid off. They own a ski condo in Collingwood;that also has a mortgage, 3 cars, a truck, a large stamp collection, and a;sizeable investment account that Daniel inherited from his late mother. Daniel;works as an independent contractor repairing roofs. His income is unsteady ? he;can make between $35,000 and $85,000 in any given year, after all business;expenses. Melissa is an attorney at a local law firm with a healthy pension and;benefits package. Melissa has recently been experiencing some health issues;related to a heart condition. Daniel has about $250,000 in his RRSP and no;pension. They want to talk to an insurance professional about adequate;insurance coverage. They plan to retire no later than age 65, but perhaps;earlier if they can.;a);List five risks faced by;this family, classify the severity and frequency, and clearly explain how they;can manage each of these risks. (20 marks);There;are many potential answers to this question.;8;b) Estimate;the amount of life insurance that Daniel requires. Use an interest rate of 3%;before-tax. There is a range of reasonable answers to this question. Justify;your answer, do not give calculations only. (8 marks);9

 

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