Section 1 - Structural questions (Q1: 19 marks; Q2: 30 marks; Q3: 17 marks; Q4: 14 marks; 80 marks in total and it will translate to 10% of the overall mark of the module) 1. Mr. D is a social worker. He lives with his wife in a village in New Territories. He has an outstanding fixed mortgage payment of $15,000 per month for 5 years. The interest rate is fixed at 5% p.a. He wishes to advance his mortgage payment by two years by paying a lump sum. Mr. and Mrs. D have a 10-year old daughter. They wish to send her daughter to a UK university for 4-year study in 8 years' time. It is expected to cost $250,000 for every 6-month in present value terms. He intends to make an initial contribution of $800,000. After that, he believes he can make $3,000 regular contribution for every 6-month (starting at t = 0.5) while he is paying the mortgage. This contribution is expected to grow with an inflation rate of 3%. After repayment his mortgage in 3 years' time, he believes he believes he can make an extra contribution of $7,500 per month (or $45,000 for every 6- month (starting at t = 3.5). Again, this contribution is expected to grow with inflation rate. a. Assume there are no extra interest and handling charges, what will be the amount he needs to repay the bank if he wants to repay all his mortgage by 2 years? (6 marks) Hints: PV Aordinary = : (1 - utb) where c, r and t are periodic payment, periodic interest rate and number of periods respectively. It is PVA Ordinary that a mortgagor owes to a bank at any time. ...[Answer the question on a plain A4 paper).... ...... [Show all the steps and write your answer to the relevant box of part e))...... b. Estimate Mr. D's daughter education expenses at t = 8.8.5. ..., and 11.5. (4 marks) [Answer the question on a plain A4 paper).. .... [Show all the steps and write your answer to the relevant box of part e))...... c. Estimate Mr. D regular contributions while he is still payment the mortgage at t = 0.5, 1, ... and 3. (3 marks) 1 of 7 -[Answer the question on a plain A4 paper). ...... [Show all the steps and write your answer to the relevant box of part e))...... d. Estimate Mr. D regular contributions while he has fully paid the mortgage at t = 3.5, 4, .... and 11.5. (3 marks) ... [Show all the steps and write your answer to the relevant boxes of part e))...... e. Use the information provided and the answers from a) to d) to complete the below cash flow table. Daughter's Early repayment Year Initial Investment Regular Contribution Education Cash Flow of mortgage Expense 0 0.5 1 1.5 2 2.S 3 3.5 4. 4.5 5 S.S 6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 11 11.5 f. Calculate the IRR of the estimate cash flow. (3 marks) .[Answer the question on a plain A4 paper)... .[Show all the steps).. 2 of 7 Section 1 - Structural questions (Q1: 19 marks; Q2: 30 marks; Q3: 17 marks; Q4: 14 marks; 80 marks in total and it will translate to 10% of the overall mark of the module) 1. Mr. D is a social worker. He lives with his wife in a village in New Territories. He has an outstanding fixed mortgage payment of $15,000 per month for 5 years. The interest rate is fixed at 5% p.a. He wishes to advance his mortgage payment by two years by paying a lump sum. Mr. and Mrs. D have a 10-year old daughter. They wish to send her daughter to a UK university for 4-year study in 8 years' time. It is expected to cost $250,000 for every 6-month in present value terms. He intends to make an initial contribution of $800,000. After that, he believes he can make $3,000 regular contribution for every 6-month (starting at t = 0.5) while he is paying the mortgage. This contribution is expected to grow with an inflation rate of 3%. After repayment his mortgage in 3 years' time, he believes he believes he can make an extra contribution of $7,500 per month (or $45,000 for every 6- month (starting at t = 3.5). Again, this contribution is expected to grow with inflation rate. a. Assume there are no extra interest and handling charges, what will be the amount he needs to repay the bank if he wants to repay all his mortgage by 2 years? (6 marks) Hints: PV Aordinary = : (1 - utb) where c, r and t are periodic payment, periodic interest rate and number of periods respectively. It is PVA Ordinary that a mortgagor owes to a bank at any time. ...[Answer the question on a plain A4 paper).... ...... [Show all the steps and write your answer to the relevant box of part e))...... b. Estimate Mr. D's daughter education expenses at t = 8.8.5. ..., and 11.5. (4 marks) [Answer the question on a plain A4 paper).. .... [Show all the steps and write your answer to the relevant box of part e))...... c. Estimate Mr. D regular contributions while he is still payment the mortgage at t = 0.5, 1, ... and 3. (3 marks) 1 of 7 -[Answer the question on a plain A4 paper). ...... [Show all the steps and write your answer to the relevant box of part e))...... d. Estimate Mr. D regular contributions while he has fully paid the mortgage at t = 3.5, 4, .... and 11.5. (3 marks) ... [Show all the steps and write your answer to the relevant boxes of part e))...... e. Use the information provided and the answers from a) to d) to complete the below cash flow table. Daughter's Early repayment Year Initial Investment Regular Contribution Education Cash Flow of mortgage Expense 0 0.5 1 1.5 2 2.S 3 3.5 4. 4.5 5 S.S 6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 11 11.5 f. Calculate the IRR of the estimate cash flow. (3 marks) .[Answer the question on a plain A4 paper)... .[Show all the steps).. 2 of 7
