Professional Documents
Culture Documents
ASSIGNMENT 2
SUBMISSION DEADLINE: MONDAY, 13 MAY 2015 AT 5.00 PM
1.
There are six (6) methods used to calculate interest. Identify and describe these
methods, giving appropriate examples.
[24 marks]
The various methods used to calculate interest include the following:
1. Simple Interest- computed on principal only, no compounding.
2. Simple Interest on the declining balance - a method used when more than one
payment is made on a simple interest loan.
3. Add-on Interest- interest is calculated on the full amount of the original principal.
4. Adjusted balance method- finance charges after payments made during the billing
period have been subtracted.
5. Previous balance method- gives no credit for payments made during the billing
period.
6. Average daily balance method- uses a weighted average of the account balance
throughout the current billing period.
2.
Each investor may have specific goals for investing but all investors must consider a
number of factors affecting the choice of investments. Identify any four (4) of these
factors and discuss how they affect your investment decisions.
[16 marks]
Factors to consider in choosing investment alternative:1.
Safety - safety in investment means minimal risk of loss. Very safe investment
which is attractive to conservative investors give low return. Examples of safe
investment are government bonds, certificate of deposit, mutual funds and
corporate bonds. Real estate may also be considered as a safe investment.
2.
4.
5.
3.
A friend wants to understand what affects the cost of auto insurance. Explain the factors
used to determine the automobile insurance premium a person pays.
[5 marks]
The main factors that influence the amount paid for auto insurance are the year, make,
and model of automobile; your geographic location; your driver classification, including
age, sex, marital status, driving record and driving habits; the amount of coverage; and
discounts for driver training, security devices, or other factors.
4.
Explain the difference between direct and indirect investments in real estate. Give
examples of each.
[5 marks]
Real estate investments are classified as direct or indirect. Direct real estate
investments, in which the investor holds legal title to the property, include a home, a
vacation home, commercial property, and raw land. Indirect real estate investments
include real estate syndicates, REITs, mortgages, and participation certificates. In
indirect investment a trustee holds legal title to the property.
5.
6.
Kenny Tan recently purchased a stereo system. After a few weeks it overheated, causing
a small fire and minor damage. What action would you recommend to Kenny to resolve
his consumer complaint?
[8 marks]
The steps that are commonly suggested to solve consumer problems are (1) return to
the place of purchase, (2) contact the company's main office, (3) obtain assistance from
a consumer agency, and (4) take legal action such as small claims court or using a
lawyer.
7.
Easy Money Financing approved your personal loan of RM5,000 to purchase a note
book computer. The interest rate is 5% per year. The loan is to be paid in 12 equal
installments. Using the rule 78s, prepare the payment schedule for each installment that
represents the interest and the reduction of debts.
[10 marks]
Total loan sum
: RM 5,000
Interest rate
: 5% per year
12
RM 5,000 x 5% x 12 = RM 250
12
: RM 5,250/12 = RM 437.50
Total Interest
Payment
No.
1
2
3
4
5
6
7
8
9
10
11
12
8.
Interest
38.46
35.26
32.05
28.85
25.64
22.44
19.23
16.03
12.82
9.62
6.40
3.20
250.00
Principal
Total
Payment
399.04
402.24
405.45
408.65
411.86
415.06
418.27
421.47
424.68
427.88
431.10
434.30
5,000.00
437.50
437.50
437.50
437.50
437.50
437.50
437.50
437.50
437.50
437.50
437.50
437.50
5,250.00
Your parents are considering the purchase of shares in a mutual fund. Discuss three (3)
advantages and three (3) disadvantages of mutual fund investing that you believe are
important for potential investors to consider.
[12 marks]
ADVANTAGES OF MUTUAL FUND INVESTING
Diversification
Professional management
Ease of buying and selling shares
Multiple withdrawal options
Distribution or reinvestment of income and capital gain distribution
Switching privileges within the same fund family
Services that include toll-free telephone numbers, complete records of all
transactions, and savings and checking accounts.
Purchase/withdrawal costs
Ongoing management fees
Poor performance that may not match the stock index
Inability to control when capital gain distribution occur and complicated tax-
reporting issues
Potential market risk associated with all investments
Some sales personnel may be aggressive and/or unethical
9.
If Carissa Dalton has a $130,000 home insured for $100,000, based on the 80 percent
coinsurance provision, how much would the insurance company pay on a $5,000 claim?
[5 marks]
$104,000 = $130,000 x 0.80
$4,807.96 = ($100,000/$104,000 $5,000)
10.
Gene, an assembly line worker at an automobile manufacturing plant, has a take home
pay of $900 a week. He is injured in an accident that kept him off work for 18 weeks. His
disability insurance coverage replaces 65 percent of his earnings after a 6 weeks waiting
period. What amount would he receive in disability benefits?
[5 marks]
Insurance will replace 65 percent of $900 or $900 x 0.65 = $585 per week. However
insurance will only pay after a 6-week waiting period or 18 6 = 12 weeks. Insurance will
pay $585 x 12 weeks = $7,020.
11.
Your credit card has an Annual Percentage Rate (APR) of 18 percent and there is a 2
percent fee for cash advances. The bank starts charging your interest on cash advances
immediately. You get a cash advance of $600 on the first day of the month. You get your
credit card bill at the end of the month. What is the total finance charge you will pay on
this cash advance for the month?
[5 marks]
- END OF ASSIGNMENT 2 -