Question

ANSWER LETTER (A) ONLY

Ivana has just moved to Edmonton to take up a position in the provincial government, earning $72,000 a year. Edmonton is a big city, so she has decided to lease a car, as well as buy a downtown condo. She has saved some money living at home with her parents up until now. But Ivana is a bit worried about her financial affairs as she has always had trouble managing money. For example, her last credit card statement showed a balance of $2,750 and she doesn’t want to take the money she has saved for a down payment to pay it off. It seems she carries a balance from month to month all the time and she knows that at a rate of 22%, compounded daily, she is paying a lot of interest.

Part a (1 mark)

Ivana’s credit card requires a minimum payment of 3% of the balance. Assume she sets her mind to paying this same amount each month until the balance is paid off and that she doesn’t charge anything new to the card. How long will it be before the balance is reduced to zero?

Calculation of credit card repayment period

Part b (1 mark)

Ivana knows that the financial institution will calculate both the GDS and TDS ratio on any mortgage loan she arranges in order to determine whether or not she qualifies. Identify two weaknesses of these ratios.

First weakness

Second weakness

Part c (1 mark)

Ivana wants to lease a Subaru Crosstrek. Assume the listed price is $35,000. There are no provincial taxes in Alberta so she will only pay the Federal GST of 5%. Ivana can make a down payment of $2,000 and estimates that the value of the car after a 4-year term would be $17,000. The applicable rate would be 6%, compounded monthly. Lease payments are required at the beginning of the month, and the applicable taxes only apply to the monthly payment, not to the full value of the car. What would be Ivana’s monthly car lease payment?

Calculation of monthly lease payment

Part d

If Ivana wishes to satisfy a maximum 40% TDS ratio, what is the most she could pay per month toward a condo mortgage? Assume her condo fees (1/2), municipal taxes and heating combined amount to $600 a month and factor in the payment on her credit card and car lease.

Calculation of maximum possible condo mortgage based on a 40% TDS ratio

Part e (1 mark)

At a rate of 3%, compounded semi-annual, how much mortgage could Ivana afford if she takes a 25 year amortization with monthly payments?

Calculation of maximum mortgage

Answer 1

As mentioned ANSWER LETTER (A) ONLY - answer is provided to Part A Credit card repayment only

In the given case interest rate provided is 22% compounded daily which comes to 0.06% per day (Considering year of 360 days, month of 30 days) or effective 1.85% per month considering the effective rate of interest formula. Payments are fixed monthly 3% of 2750 i.e 82.5$ per month at the end of the month,

hence using NPER (to calculate periods)Formula in spreadsheet the answer is

=NPER(Rate=1.85%,Installment = -82.5$, Loan Amount - 2750$,FV=0(reduced to 0), Annuity type = 0 - payment at the end of periods)

The period comes to 52 Months - 53 months

Detailed image posted for easy understanding as how the balance gets paid off between 52nd-53rd month