ANSWER LETTER (A) ONLY
Ivana has just moved to Edmonton to take up a position in theprovincial government, earning $72,000 a year. Edmonton is a bigcity, so she has decided to lease a car, as well as buy a downtowncondo. She has saved some money living at home with her parents upuntil now. But Ivana is a bit worried about her financial affairsas she has always had trouble managing money. For example, her lastcredit card statement showed a balance of $2,750 and she doesn’twant to take the money she has saved for a down payment to pay itoff. It seems she carries a balance from month to month all thetime and she knows that at a rate of 22%, compounded daily, she ispaying a lot of interest.
Part a (1 mark)
Ivana’s credit card requires a minimum payment of 3% of thebalance. Assume she sets her mind to paying this same amount eachmonth until the balance is paid off and that she doesn’t chargeanything new to the card. How long will it be before the balance isreduced to zero?
Calculation of credit card repayment period
Part b (1 mark)
Ivana knows that the financial institution will calculate boththe GDS and TDS ratio on any mortgage loan she arranges in order todetermine whether or not she qualifies. Identify two weaknesses ofthese ratios.
First weakness
Second weakness
Part c (1 mark)
Ivana wants to lease a Subaru Crosstrek. Assume the listedprice is $35,000. There are no provincial taxes in Alberta so shewill only pay the Federal GST of 5%. Ivana can make a down paymentof $2,000 and estimates that the value of the car after a 4-yearterm would be $17,000. The applicable rate would be 6%, compoundedmonthly. Lease payments are required at the beginning of the month,and the applicable taxes only apply to the monthly payment, not tothe full value of the car. What would be Ivana’s monthly car leasepayment?
Calculation of monthly lease payment
Part d
If Ivana wishes to satisfy a maximum 40% TDS ratio, what isthe most she could pay per month toward a condo mortgage? Assumeher condo fees (1/2), municipal taxes and heating combined amountto $600 a month and factor in the payment on her credit card andcar lease.
Calculation of maximum possible condo mortgage based on a 40%TDS ratio
Part e (1 mark)
At a rate of 3%, compounded semi-annual, how much mortgagecould Ivana afford if she takes a 25 year amortization with monthlypayments?
Calculation of maximum mortgage
