Question 1
You have just graduated, are dead broke, but would still like to buy a new car so that you can
show it off on Instagram. Your rich Aunt Amy, who is a retired investment banker at the age
of 35 because she knew better, is willing to lend you the money to buy the car, as long as you
promise to pay her back in four years. You propose to pay her the rate of interest she would
otherwise get by putting the money in the bank, which has deposit and loan rates of 2% and
6%, respectively. Based on your projected income and living expenses, you anticipate that
you will be able to pay her $30,000, $40,000, $45,000, and $50,000 at the end of each of the
next four years, respectively.
(a) If your aunt accepted your proposal, how much would she be willing to lend you
today?
(4 marks)
(b) How much would your aunt have in four (4) years if she chooses not to lend you the
money?
(3 marks)
(c) How much would your aunt have in four (4) years if she chooses to lend you the
money?
(5 marks)
(d) Based on your calculations in parts (b) and (c), you believe your aunt should be
indifferent between lending you the money or putting the money in the bank. Discuss
whether she would agree with your assessment.
(8 marks)
(e) Suppose your aunt proposes to make you indifferent between borrowing from her or
borrowing from the bank instead. How much would she be willing to lend you today?
(4 marks)
FIN304 Tutor-Marked Assignment
SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 3 of 4
(f) You and your aunt eventually agree to an interest rate of 4%. Explain whether you
win, whether your aunt wins, and how such an outcome can be possible.
(9 marks)
Question 2
You would like to purchase a private condominium that costs $1.2 million, and you are
shopping around for a housing loan. As this is your first housing loan, the Monetary
Authority of Singapore (MAS) allows you to have a loan-to-value (LTV) limit of 75%. Also,
you are required to maintain a total debt servicing ratio (TDSR) of 60%. The best deal you
could find is by the Digital Bank of Singapore (DBS), which offers a fixed-rate loan of 1.8%
per annum and makes a net interest margin of 0.6% per annum. You would like to take out a
loan for 35 years and do not have any other outstanding debt.
(a) How much must your gross monthly income at least be in order to afford this
condominium?
(8 marks)
(b) Suppose you are able to take out this loan. Without constructing a loan amortisation
schedule, calculate the total amount of interest you would pay over the life of the
loan.
(4 marks)
(c) Is your calculation in part (b) technically appropriate? If yes, explain why. If not,
come up with an alternative measure of the dollar cost of borrowing that is technically
appropriate and interpret that measure
(10 marks)
While you are browsing the bank’s website, you find that DBS quotes an interest rate
of 1.6% per annum on a car loan. Incidentally, you are thinking about buying that
cheapest possible Mercedes A-Class Saloon, which costs $180,000. MAS rules
restrict financing to 60% of this car for a maximum loan tenure of 7 years which you
plan to max out. The terms of the loan contract states that monthly payments are
computed using the following formula:
(d) Assess whether the housing loan or the car loan is more expensive by comparing
appropriate annual rates.
(10 marks)
(e) If the conclusion reached in part (d) is different from the conclusion reached through a
comparison of rates quoted by DBS, explain why. Also, explain why the rate of one
loan type should be higher than the rate of another loan type.
(10 marks)
FIN304 Tutor-Marked Assignment
SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 4 of 4
Question 3
Your friend’s father just turned 55 and is thinking of joining CPF LIFE. He tells you that if
he sets aside the Basic Retirement Sum (BRS) of $90,500 today, he can expect an
approximate monthly payout from age 65 of $780 for as long as he shall live. Alternatively, if
he sets aside the Full Retirement Sum (FRS) of $181,000 today, he can expect an
approximate monthly payout from age 65 of $1,440. Assume that the interest rate is 4% and
that compounding occurs monthly.
(a) What is the breakeven age for the BRS plan?
(8 marks)
(b) What is the breakeven age for the FRS plan?
(8 marks)
(c) At what life expectancy would your friend’s father be indifferent between the two (2)
plans? Which plan should he choose given male life expectancy in Singapore?
(9 marks)