Margin Accounts

ADMS 3541 Summer 2015

Section B

Assignment #2

Chao Li 213241716

Xin Wu 212076980

Pai Wang 212509618

Yixuan Liu 212463295

Junyi Song 212552774

Question 1

Part A

Face value      15,000

Coupon rate   12%

Current price 17,000

Maturity 10 years

17,000= 1800[1/k -1/k (1+k) ^10] + 15,000[1/ (1+k) ^10]

We can solve k by using calculator.

-17,000 PV

10              N

1800          PMT

15000        FV

I/Y            Answer = 9.84%

bond's yield-to-maturity is 9.84%

Part B

(1+9.84%/2)^2 -1= 10.08%

the effective yield-to-maturity is 10.08%

Question 2

Part A

Margin accounts can help investors buy more securities than you can currently afford through take out a loan from the stock broker. But the investors need to collateralize with cash and securities in some special margin level. If the stock increases in value, you can use the gains to pay off the loan and make a nice profit. If the stock drops in value, your loss will be compounded, since you'll still need to pay off the loan. If investors want to borrow 10,000 dollars and the margin level is 65%, the investor need to pay 6,500 dollars as deposit and get 3,500 from the broker and use 10,000 dollars to buy the securities. The investors can withdraw the cash or buy more securities when the securities value rise. But the investor will need to pay more deposit when the securities drops.

Part B

the stock price is $50 per share. so according to TD’s Margin Requirements & Concentration Guidelines, the margin rate is 30%. The total cash I have is $5000. so we can get the maximum stock I can buy is:

5000/(30%*50)=5000/15=333

so I can buy 333 stocks.

Question 3

1. Potential sources of income in Retirement (for 2015):

RRIF withdrawal formula is: Market Value of the RRIF as at Dec.31 =$200,000 =$877.19

           90-The plan holder’s age  (as at Dec.31)                                   90-71        

2.

Assumptions:

a. Client is only entitled to 60% of deceased spouse’s private pension plan.

b. Client was the beneficiary on deceased spouse’s RRIF

c. We will use the client’s age as at Dec.31/11 in the withdrawal formula (see above).

d. The client’s collecting CPP at age 65.  

Question 4

1.        Describe 4 strategies that you can recommend to your client to ensure that her estate planning wishes will be fulfilled.

Introduction:

1. The client has a valid Power of Attorney in place

2. She does not like wills because she thinks it is ominous

3. She has a spouse and three children

4. Also, she wants to leave money to on her death

Problem Statement:

1.       The client does not like wills and she will not change her mind. Therefore, the first question is that are there any other way to replace the will? In other way, are there any equivalents or substituted of the will?

2.       What is more, the second question is some strategies that help the client to fulfill her estate planning.

Analysis (Strategies):

1.       The first strategy is preparing an inventory of your assets and liabilities (i.e. net worth statement and cash flow statement). There is no doubt that family financial statement is an indispensable part of the whole process of the estate planning. To be more specific, individuals get snapshot on what they are worth financially. Also, people can understand the risk tolerance of themselves. It plays pivotal role in buying the financial products and making the long-term financial planning.

2.       The obvious fact is that the client is not interested in wills, so the second strategy is that we should find an equivalent of the will. According to the question, it is not difficult to see that the client as a valid Power of Attorney. However, the Power of Attorney becomes effective only in situations where the person is still living but is incapable of making their own decisions. In this case, the client is health and capable of making her own decisions. It is manifest that the attorney is not useful at this time. Hence, we should consider the living trust which is the substituted of the will.