Question 1

After some years of working, your fiancé/fiancée and you are getting married. You intend to buy an apartment by setting aside 30% of your combined gross income for monthly mortgage payments. Currently, your monthly combined income is $10,000.

You saw an apartment selling at $500,000 and are prepared to pay $80,000 with your existing savings as downpayment and borrow the remaining amount. For the mortgage loan, the bank charges a fixed rate APR of 5% for a 20-year loan. You are expected to pay monthly instalments for the mortgage loan.

(a) What is the monthly instalment for the mortgage loan?

(b) Using an amortization schedule, demonstrate the interest and principal payments in the first 12 months. Calculate the total interest paid for the entire loan period (20 years)?

(c) Plot a chart to show the trends of monthly instalment payments, interest payments and principal payments over time. Account for the differences in these trends.

(d) Discuss two (2) factors you would consider for your accommodation before buying this apartment.
After settling the mortgage, you are contemplating to buy a new car. However, you are only willing to spend $2,000 per month for the car loan. The bank’s APR is 8% for a 10-year car loan.

(e) What is the most expensive car you can buy (ignore COE)?

Your financial advisor friend approaches and advises you to invest in asset X with its expected nominal annual returns in the table below. Inflation rate is expected to be 3% per year for the next 5 years.

(f) Compute the average real annual returns for Assets X.