QUESTION 6 (15 marks)

Mr. Cheong maintains a credit card balance of RM15,000.00. This means that he owes credit card issuer on average, RM15,000.00 at the end of every month. The bank charge Mr. Cheong 1.75% per month. The credit card balance is the only form of debt which Mr. Cheong has taken up. On the asset side, Mr. Cheong keeps RM70,000.00 in fixed deposit with a commercial bank with annual interest of 4.3%. Mr. Cheong has no other asset besides the fixed deposits.

REQUIRED:

1. Calculate the net worth of Mr. Cheong using information given above.

[3 marks]

2. Supposing Mr. Cheong does nothing about his financial position but just allow the interest on both asset and liabilities to accumulate, how much should be Mr. Cheongs net worth after 10 years? Assume that there is no penalty charges for no payment of credit card for 10 years as well as there is no annual fees on credit card every year.

Support your answer with calculations.

[7 marks]

3. As a financial planner, what is your advice to Mr. Cheong based on your finding in (b)?

Support your argument with calculations.

[5 marks]