-3-

QUESTION 3:

Anthony who just turned 45 is considering buying a $250,000 life insurance policy on himself in favour of his daughter Audrey. Audrey a high school student will be done with her University education in 6 years. After 6 years Anthony will no longer need life insurance because Audrey will be done with her university studies, and will be on her own. Anthony wants to pay a level premium. The appropriate interest rate is 5%. Determine the pure level premium per year.

QUESTION 4:

Teresa Choi is thinking of switching from Nova MasterCard to Brunswick VisaCard. Her average month-end balance on the credit card is $4,000, which she pays off on the last day of the grace period. Every winter she flies to California, and rent a car for two weeks for sightseeing. She keeps her extra cash in a savings account earning 3% p.a. Following are the relevant features of the two cards:

MasterCard VisaCard

Grace period 25 days 15 days

Rebate on every purchase1 1.5% 2%

Card fee at the beginning of year $110 $90

Annual interest rate on overdue balance 28% 20%

Collision damage waiver on rental cars2 yes no

Extended warranty3 yes yes

1 Paid at year-end,

2 Suppose car rental agencies charge $26 per day to insure against collision.

3 extends manufacturer's warranty by one year on the items purchased using VisaCard.

Maximum repair cost covered is $500 per year by MasterCard and $800 by VisaCard. Repair cost is reimbursed at the end of the year.

Which credit card is better for him? Do not ignore cash flows timing.