personal finance assignment

Chris from Assignment #1 has now turned 35. (S)he has two children aged five and seven. From the passing away of her grandmother, Chris has inherited $150,000. This gives Chris some choices: pay down the mortgage, contribute to an RRSP, contribute to a TFSA, contribute to an RESP, or put the money in a cash account. (S)he can do more than one thing with the money.

The outstanding mortgage is two-thirds of the amount shown in Assignment #1 at the rate you used for that assignment. If you have not chosen a rate, you can choose an existing interest rate. (S)he can put all the money in a cash investment account, but all gains are taxed. (S)he can contribute to an RRSP but the limit for contributions for 2016 is $25,000. (S)he does not have a TFSA, so (s)he can open up one and make contributions to a limit of $20,000. Finally, (s)he can make a contribution to an RESP for his/her children. There is a $50,000 lifetime limit per child, but only the first $2,500 in any year receives the twenty-percent Canada Education Savings Grant.

  1. If you decide to pay down the mortgage, your choice needs to make sense financially. You would need to consider if the reduction in the mortgage would allow him/her to pursue other opportunities. You would also have to consider the interest rate of the mortgage compared to the rates of return (s)he could receive elsewhere.
  2. If you decide to contribute to a cash investment account, your plan may have either a short-term or long-term investment plan. If the goals are short-term, you may want to consider more debt securities. If they are long-term, generally, they can include moreequities.
  3. If you do decide to contribute to an RRSP, keep in mind that one guiding principle is that RRSPs should be planned with long-term investments in mind. Thus, investments should be chosen because, in the long run, they will be profitable. Normally, short-term, risky, but potentially profitable investments are avoided, but they can make up a small (no greater than 25 percent) portion of the investment.
  4. If you decide to put of the money in a TFSA then consider that the goals of this account can either be similar to the RRSP or the cash investment account.
  5. If you decide to put the money in a RESP remember that the goals are long range, as the oldest child would not normally be using the money for nine or ten years in the future.

 

Investments can be made in Canadian or American securities. Your plan must show:

  1. How you will allocate the cash among the different options that are available.
  2. What debt or equity security you bought.
  3. The price at which you bought it. If you are buying stocks, you must show the share price and the date of that share price. If you are purchasing American securities, calculate the cost in Canadian funds by looking at the exchange rate. Use the “purchase cash” rate if more than one rate is shown. You can go to http://www.xe.com/ to calculate Canadian dollar amounts for quite a number of foreign currencies.
  4. Give a reason for your purchase. Examples would be the stability of the investment, the expected long-term gain, the dividends paid by the company, the speculative quality of the investment, the diversity, and so on.
  5. You can only buy stocks, bonds, or mutual funds. You can also decide to have a portion of your portfolios as cash and not invested in anything. However, because this is an assignment about stocks, bonds, and mutual funds, you cannot buy real property or any other investment that is not a stock, bond, or mutual fund.
  6. Your answer should be about 1,000 words.

To guide you in this exercise, you should have investments of about $20,000 to $25,000 each. For example, if you choose to put all the money in a cash investment account, then you would have two separate investments. If you chose to put $10,000 in the TFSA and $40,000 in the RRSP, then you should have three investments, one for the TFSA and two for the RRSP. You can choose the same investment for different accounts.

While this is an individual assignment, you are encouraged to talk to others in your group for ideas. You can use each other’s ideas, but you must provide your own explanation.

The mark for this assignment will be determined on how well you support your choices of investments. The mark will not be influenced at all by the performance of your investments. In other words, a well-supported investment suggestion for which the investments do poorly will receive a higher mark than a plan that is not so well supported, but does have investments that do well.

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