Question #1 (7/10 points)
You have a wealthy family. Your father decides that he wants you to make your own way and does not want to give you access to much wealth until you are older. He agrees to cover your basic expenses with $500 per month for 30 years with an annuity. After the 30 years, you can access the rest of the family wealth, which is currently valued at $5 million in a deposit account (not including the annuity value). Both the account and the annuity are with a very safe financial institution, which pays interest at 4% per annum, compounding monthly.
A. Under your father’s plan, how much will you receive on the final month of the 30-year period?
B. How much did your father pay for the annuity?
C. You do not want to wait for 30 years to access the funds. Design a contract that would allow you access as much of the money as possible today. Assume 1) a second financial institution will allow you to enter into any type of financial contract and 2) your father forgot to include any restrictions against such agreements. Explain the contract terms and payments. Keep it simple, more marks will be awarded the simpler the contract you come up with. Also name a security discussed in class that most closely resembles your contract. (200 words maximum)
D. If most financial institutions consider you “risky” and would generally lend you money at a rate of 8% per annum (monthly compounding), how much money could you access today with your agreement in Part C?
Question #2 (2/10 points)
You have an investment advisor who manages your investments worth $10 million for 10 years. He promises to get you very high annual returns (near 8% p.a. before fees, annual compounding) and asks for a fee of 1% of the value of the fund each year. He suggests that this is reasonable, as it is only about a $1 million decrease to your final wealth since a 1% fee each year over 10 years, as (1.01)10-1=10.46% in fees after 10 years. What is wrong with the adviser’s intuition? Would you trust this adviser with your money?
(200 words maximum)
Question #3 (1/10 points)
What did the RBA decide to do to the cash rate on 2 August 2016?
How did the RBA justify its decision? What factors or events were considered?
(200 words maximum)
Referencing Any outside references (textbooks, articles, books, websites, etc.) should be referenced using Harvard, MLA, or APA styles.