Personal Finance Questions and Answers

Question 1: Should the Canadian Government Create Additional Tax Incentives for Saving?

Question 1 ( 2 point):

Given the high personal debt Canadians have, explain (in no more than 10 points), whether the Canadian Government should create, in its 2021 Budget, additional tax incentives to promote saving ?

Question 2. ( 1 point):

Identify 3 problems in your home or professional life that could be solved using the concept of present value.

Question 3. ( 2 points):

How would you use present value to decide how much to save for your retirement? What discount rate would you use in your calculations? Why? ( point format)

Question 4. (1 point):

Suppose you have purchased 10-year Government of Canada bonds that you expect to hold for 5 years and then sell. What sort of economic news ( indicate 3) would likely create a capital loss for your bond holdings? What sort of news ( indicate 3) would likely create a capital gain?

Question 5. (6 points):

Please research and briefly explain what did Irving Fisher mean when he famously said that the (real) rate of interest was determined by the interaction between the patience of the nations population and the productivity of its capital?

Question 6. (2 points)

Given the way you invest financially, does it make more sense for you to pay attention to the TSX or to some other stock market index? Why? (2 points)

Question 7 - Mini-case (6 points):

A Vancouver retailer is facing increasing competition from big shops that are opening in his area. He thinks that if he does not modernize his premises he will lose sales. A Vancouver building entrepreur, estimates that the cost of modernizing the shop will be $40,000 if the work is started now.

The retailer is not sure whether to: borrow the money and modernize the premises now, or to save up and have the work carried out when he has sufficient funds himself. Current forecasts show that if he delays the work for three (3) years, the cost of the modernization is likely to rise by 4% per year.

Because of the Vancouver hot construction market. Market reseach have revealed that, if he borrows, he will have to pay interest at the rate of 3% per quarter, but is he saves the money himself he will only earn 2% per quarter.

Required:

1. Calculate the equal amount that would need to be paid at the end of each quarter if the retailer decides to borrow the money at 3% per quarter for 3 (three) years.

2. Calculate the equal quarterly amount that need to be invested into the savings fund (first instalment paid immediately), so that there is sufficient in the fund to carry out the work in three (3) years time.

3. Discuss the advantages of each of the two ways of financing the modernization and suggest any other factors that should be taken into consideration before deciding how and when to finance the modernization. Also give one relevant example similar to any one of the question.