AFF 210: Sofia is 40 Years Old Case Study - Accounting and Finance Assignment Help

Assignment Task:

Task:

PROBLEM ONE (20 MARKS)
You are planning to buy a house in Toronto that has a price of $1,500,000. One of the local banks has offered you a mortgage at a quoted rate of 5% per year. Interest will be compounded semi- annually. The bank has indicated that they will require 25% down payment. The bank is prepared to lend you the remainder of the purchase price of the house. The amortization period will be 25 years and the term of the mortgage will be 4 years. You are going to make monthly payments on your mortgage. The payments will be made at the end of each period. You have heard from your friend who has just completed AFF210, that by making additional payments on your mortgage during the initial term, you can reduce the remaining balance at the end of the initial term. Your friend has shown you a sample amortization schedule template (below). Sample Mortgage Schedule Payment Number

Principal Amount at the Beginnin g

Interest Expense incurred during the month

Balance Owing Before Payment

Amount of Payment

Principal Component of Payment

Principal Amount at the End of Period

Principal Paid / Amount of Payment

1
2
…
a) Answer the following questions:
i. What is the amount of your periodic payment?
ii. How much will you pay in total on your mortgage over the life of your mortgage?
iii. What is total interest that will be paid over the life of your mortgage?
iv. How much principal will you have paid off during the initial term of your mortgage?
v. How much interest will you have paid off during the initial term of your mortgage?
b) Prepare a mortgage amortization schedule to illustrate how the mortgage will be repaid over the next 25 years and calculate the following:
c) Assuming that you decide to make additional annual payments of $10,000 during the initial term of your mortgage, how much less do you owe to the bank at the end of the term? The extra payments will be made in months 12, 24, 36 and 48. Assuming you make no additional extra payments during the life of your mortgage how much interest do you save, by making the extra payments during the initial term of your mortgage?

Sofia is 40 years old. She has 3 children, Meg age 2, Jo age 4 and Amy age 5. However, she is already planning for retirement. She plans on retiring in 15 years when she will be 55 years old. Sofia believes she will live until she is 100.
In order to live comfortably, she thinks she will need to withdraw $15,000 every month during retirement. These monthly withdrawals will be made at the beginning of each month during retirement. Also, Sofia has pledged to donate $1,500 a week to her favorite charity during her retirement. The payments will be made at the end of each week. The last payment will be made when she dies. In addition, she would like to establish a scholarship at Ryerson. The first payment from scholarship would be $60,000. The first scholarship payment would be made 4 years after she retires. Thereafter scholarship payments will be made every year. To keep pace with inflation, Sofia would like the amount of scholarship payments to increase by 2.5% each year. She wants the payments to continue after her death, therefore the payments will go on forever. During retirement, Sofia expects to earn 4% per year compounded semi-annually. Sofia also wishes to give each of children $200,000 when they reach the age of 30.

She currently has $250,000 in a locked-in investment that earns 5% interest per year compounded monthly. Sofia currently contributes $4,000 every month to an investment account. These contributions are made at the end of each month and will continue until she retires at 55. Sofia expects to earn 6% per year compounded annually on her monthly contributions to her retirement account.
a) How much money does she need when she retires at the age of 55? Be certain to include all her financial goals.
b) How much money will she have when she retires?
c) How much is she short? [Hint: that would be the difference between the amounts in parts (a) and (b)]

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