Quantitative 9: Recommendations for Part 2 Page

Quantitative 9: Recommendations for Part 2 Page

Quantitative Skill Financial Planning for Mr George Tan & Mrs Mary Chan Batch No: DBA 2A/11 Lecturer: Ms Cindy Lum Submission Date: 18 May 11 GROUP MEMBERS Wong Kim Fatt Hoon Qiu Ning Huang Hui Zhen Eldwin Quek Kiok Liang James Chua Ming Loon Quantitative Skill 2011 CONTENT PAGEPage 1: Title Page Page 2: Contents Page 3: Executive Summary Page 4: Table 1 Financial Plan for 20 Years invest in stock, ordinary annuity & annuity due & Company Background Page 5: Table 2 Comparison of investment options in term of risk and return & Chart 1 Comparison of capital and return for investment Page 6: Recommendations for Part 1 Page 7: Table 3 Renting compared to buying a home for staying purpose Page 8: Table 4 Monthly payment for principal and interest of $120,000 mortgage & Calculations for monthly mortgage payment & Total interest incurred.

Page 9: Recommendations for Part 2 Page 10: Conclusions for both Part 1 & 2. Page 11: References Page 12: Appendices Page 13: Appendices Page 14: Appendices Page 2 of 14 Quantitative Skill 2011 Executive Summary We have planned a financial planning for newlywed couple, Mr and Mrs George Tan with little knowledge of investment and low risk profile. They are early thirty with $6,000. 00 combine of income monthly.

We have prepared a comparison table and chart on stock, ordinary annuity and annuity due in term of return and risk profile for investment time frame of 20 years.Besides, investment company background also been analysed by us due to market stability and durability issue. According to their risk profile, we encourage them to invest in annuity due of $300. 00 quarterly payment at 8% interest compounding quarterly. Total investment amount of $24,000.

00 and return of $35,294. 23 in 20 years time. Buying a house definitely is better option than renting for this couple because their financial status is allowed them to own a house with comfortable instalment payment monthly. We have compared between five banks in term of loan tenure, interest rate, monthly instalment and total interest incurred.CIMB Bank with loan tenure of 10 years, annual interest rate of 5%, monthly instalment of $1,273.

20 and total interest of $32,784. 00 is the best option in term of total interest payable. Although the monthly instalment payment is the highest among the others, but it is worth because of lowest annual interest rate and loan tenure.

By selecting CIMB bank, they will work faster towards financial freedom. Page 3 of 14 Quantitative Skill 2011 1. Financial planning for Mr George Tan and Mrs Mary Chan with combined income of $6,000. 00 per month.Table 1: Financial plan for 20 Years invest in stock, ordinary annuity and annuity due Investment Type Common Stock Ordinary Annuity Annuity Due Expected Annual Interest Rate 15% 8% 8% Compounding Frequency Monthly Semi-Annual Quarterly Total Capital ($) 3,000.

00 24,000. 00 24,000. 00 Accumulated Return ($) 56,146.

48 33,015. 60 35,294. 23 Maturity Value ($) 59,146. 48 57,015. 60 59,294.

23 Company MacDonald’s Corporation Post Office Saving Bank Post Office Saving Bank Refer to appendices Figure 1 to 3 for computation. 1A. Company Background ) McDonald’s Corporation McDonald’s Corporation was founded in 1948 based in United States, listed New York Stock exchange and composite index of Dow Jones Composite.

Macdonald’s Corporation franchises and operates McDonald’s restaurants as a worldwide foodservice retailer. McDonald’s restaurant offers variety of fast foods, hot and cold beverages. As at 31 Dec 2010, the company operated more than 30,000 restaurants worldwide.

This company has around 400,000 full time employees. ii) Post Office Saving Bank (POSB) POSB founded in 1877 by the British colonial government.After acquired by DBS Bank of Singapore in Nov 1998, DBS attempts to continue offers low-cost banking services to Singaporean.

POSB’s parent company, DBS is listed in Singapore Stock Exchange and composite index of Straits Times Index. DBS is the largest bank in South East Asia in term of assets. Page 4 of 14 Quantitative Skill 2011 iii) Singapore Government Singapore is a sovereign republic, with a legal system based on the English common law. The Constitution lays down the fundamental principles and basic framework for the three organs of state, namely, the Executive, the Legislative and the Judiciary.

Table 2 : Comparison of investment options in term of risk and return Compan y MacDonald’s Corporation (MCD) Post Office Saving Bank Post Office Saving Bank Frequen cy Of P aym en t Payment $3,000. 00 OneOne time only. $600. 00 Semi SemiAnnually for 20 Years.

$300. 00 Quarterly for 20 Years. Risk Profile Aggressive I nvestment Return High Remarks Return is subject to market performance and highly volatile. Return is stable and safe but subject to existence of bank. Return is stable and safe but subject to existence of bank.

Conservative Average ConservativeAverage Chart 1 : Comparison of capital and return for investment $70,000. 00 $60,000. 00 $50,000. 00 Amount $40,000. 00 $30,000.

00 $20,000. 00 $10,000. 00 $0. 00 Macdonald’s (Stock) POSB (Ordinary Annuity) 24,000. 00 33,015.

60 57,015. 60 POSB (Annuity Due) 24,000. 00 35,294. 23 59,294. 23 Capital ($) Accumulated Return ($) Maturity Value ($) 3,000. 00 56,146.

48 59,146. 48 Page 5 of 14 Quantitative Skill 2011 1B. Recommendations Mr George Tan and Mrs Mary Chan a newlywed couple, early thirty of age, have little knowledge of investment and risk averse.

Invest with Macdonald’s stock is risky because the stock market is unpredicted and highly volatile nowadays but the return is high with only one time investment amount of $3,000. 00. POSB ordinary annuity of $600. 00 semi-annually payment at 8% interest looks attractive and the risk is conservative but the return is lesser than annuity due with the same amount of capital, $24,000. 00.

POSB annuity due of $300. 00 quarterly payment at 8% interest will create saving habit for newlywed couple and lessens their burden, only $100. 00 a month.Therefore, this newlywed couple has more money to pay their wedding expenses and cope with increasing living cost due to escalating of inflation. The return of both annuities from POSB is safe and stable but subject to existence of bank. We advise Mr George Tan and Mrs Mary Chan to choose POSB annuity due of $300. 00 payment quarterly at 8% interest as at this moment according to their financial status and risk profile to avoid uncertainty in stock market and start a financial plan with stability, conservative, realistic and comfortable.

Page 6 of 14 Quantitative Skill 2011 2.Housing loan commitment Table 3 : Renting compared to buying a home for staying purpose Renting Freedom to move Expenses Low down payment Rental subject to economical changes Rental only be paid by cash Buying Long term commitment Asset accumulation High down payment Fixed monthly installment Monthly installment can be paid by CPF & Cash Renting a house will have freedom to move with low down payment. There are some limitations of renting like rental is subject to economical changes and payment of rental is only by cash. This cash payment of rental will create expenses instead of asset building.Buying a house is a long term commitment and need high down payment if compare to renting. But buying a house is asset accumulation with fixed monthly installment that can be paid by CPF and cash payment.

Page 7 of 14 Quantitative Skill 2011 Table 4: Monthly payment for principal and interest of $120,000 mortgage Loan Tenure (Years) 30 25 20 15 10 Annual Interest Rate (%) 8. 75 7. 00 6.

25 5. 50 5. 00 Monthly Instalment ($) 944.

40 848. 40 877. 20 980. 40 1,273. 20 Total Interest ($) 219,984.

00 134,520. 00 90,528. 00 56,472. 00 32,784. 00 Bank DBS UOB HSBC MAYBANK CIMB Calculations DBS Bank Monthly mortgage payment = $120,000 / $1,000 X 7. 7 = $944.

40 Total interest = (30 X 12 X $944. 40) – $120,000 = $219,984. 00 UOB Bank Monthly mortgage payment = $120,000 / $1,000 X 7. 07 = $848. 40 Total interest = (25 X 12 X $848. 40) – $120,000 = $134,520.

00 HSBC Bank Monthly mortgage payment = $120,000 / $1,000 X 7. 31 = $877. 20 Total interest = (20 X 12 X $877. 20) – $120,000 = $90,528. 00 MayBank Monthly mortgage payment = $120,000 / $1,000 X 8.

17 = $980. 40 Total interest = (15 X 12 X $980. 40) – $120,000 = $56,472. 00 CIMB Monthly mortgage payment = $120,000 / $1,000 X 10.

61 = $1,273. 20 Total interest = (10 X 12 X $1,273. 20) – $120,000 = $32,784. 00Page 8 of 14 Quantitative Skill 2011 2A. Recommendations Before we make any recommendations, we gathered information like loan tenure and monthly affordability installment range from Mr and Mrs George Tan. For financial institutions, we asked for interest rate with different loan tenure, taxes, processing fee, insurance charges and early settlement fee.

This information will help us to plan for buying a house with cost-effectively. We advise Mr and Mrs George Tan to finance their house with CIMB bank because the total interest of $32,784. 00 for the loan tenure of 10 years at 5% with monthly installment of $1,273. 20.Although the monthly installment is the highest compare to others but the total interest is the lowest.

This will save a lot in term of interest charges. Besides with combine income of $6,000. 00 is manageable to fund the monthly installment and part of the installment can be paid by CPF if both of them continue working. By choosing CIMB bank, they will achieve financial freedom faster because the loan tenure only 10 years.

Page 9 of 14 Quantitative Skill 2011 3. Conclusions We are planning for Mr and Mrs George Tan according to affordability, conservative and stability method in term of investment as at this moment for a newlywed couple.As time goes by, they may diversify their investment portfolio to stock when they have increment in salary and promotion if the risk tolerance level increases. Buying a house is better than renting in the long run but it depend on individual financial situation. Buying will build up asset accumulation if the loan is fully paid up. Besides, buying is a long term commitment, so our approach is lowest total interest, shortest loan tenure and comfortable monthly installment to avoid unnecessary financial burden.

Page 10 of 14 Quantitative Skill 2011 References – Quantitative Skills Text Book, 1st edition, Pearson Custom Publishing, 2011 www. yahoofinance. com – www. googlefinance. com – http://en. wikipedia. org/wiki/Main_Page – http://www.

gov. sg/government/web/content/govsg/classic/about_us – http://en. wikipedia. org/wiki/List_of_banks_in_Singapore – Ref: http://michaelbluejay. com/house/rentvsbuy. html – Refence: http://en.

wikipedia. org/wiki/McDonald’s Page 11 of 14 Quantitative Skill 2011 Appendices Figure 1: Invest $3,000. 00 on Macdonald’s Corporation share for 20 years, annual interest rate of 15% compounding monthly.

Interest rate = 15% / 12 = 1. 25% Number of period = 20 x 12 = 240 FV = P(1+R)N, $3,000(1+0. 0125)240 = $3,000(1.

125)240 = $59,146. 48 Page 12 of 14 Quantitative Skill 2011 Appendices Figure 2: Purchase a semi-annual ordinary annuity of $600. 00 for 20 years at 8% interest rate annual compounding semi-annually.

Interest rate = 8% / 2 = 4% Period = 20 x 2 = 40 FV of annuity = annuity payment x table value = $600. 00 (95. 026) = $57,015.

60 Period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Semiannually Payment 600. 00 600. 00 600. 00 600. 00 600.

00 600. 00 600. 00 600.

00 600. 00 600. 00 600. 00 600. 00 600.

00 600. 00 600. 00 600. 00 600. 0 600.

00 600. 00 600. 00 600. 00 600. 00 600. 00 600. 00 600.

00 600. 00 600. 00 600. 00 600. 00 600. 00 600. 00 600.

00 600. 00 600. 00 600. 00 600. 00 600. 00 600. 00 600.

00 600. 00 Interest 24. 00 48.

96 74. 92 101. 92 129. 99 159. 19 189.

56 221. 14 253. 99 288. 15 323. 67 360. 62 399.

04 439. 01 480. 57 523. 79 568.

74 615. 49 664. 11 714.

67 767. 26 821. 95 878. 83 937. 98 999. 50 1,063. 48 1,130. 02 1,199. 22 1,271. 19 1,346. 04 1,423. 88 1,504. 84 1,589. 03 1,676. 59 1,767. 65 1,862. 36 1,960. 85 2,063. 29 2,169. 82 Total 600. 00 624. 00 648. 96 674. 92 701. 92 729. 99 759. 19 789. 56 821. 4 853. 99 888. 15 923. 67 960. 62 999. 04 1,039. 01 1,080. 57 1,123. 79 1,168. 74 1,215. 49 1,264. 11 1,314. 67 1,367. 26 1,421. 95 1,478. 83 1,537. 98 1,599. 50 1,663. 48 1,730. 02 1,799. 22 1,871. 19 1,946. 04 2,023. 88 2,104. 84 2,189. 03 2,276. 59 2,367. 65 2,462. 36 2,560. 85 2,663. 29 2,769. 82 Maturity Value 600. 00 1,224. 00 1,872. 96 2,547. 88 3,249. 79 3,979. 79 4,738. 98 5,528. 54 6,349. 68 7,203. 66 8,091. 81 9,015. 48 9,976. 10 10,975. 15 12,014. 15 13,094. 72 14,218. 51 15,387. 25 16,602. 74 17,866. 85 19,181. 52 20,548. 78 21,970. 73 23,449. 56 24,987. 54 26,587. 05 28,250. 53 29,980. 5 31,779. 77 33,650. 96 35,597. 00 37,620. 88 39,725. 72 41,914. 75 44,191. 33 46,558. 99 49,021. 35 51,582. 20 54,245. 49 57,015. 60 Page 13 of 14 Quantitative Skill 2011 Appendices Figure 3: Purchase a quarterly annuity due of $300. 00 for 20 years at 8% interest rate compounding quarterly. Interest rate = 8% / 4 = 2% Period = 20 x 4 = 80 FV of annuity due = annuity payment x table value x (1 + period interest rate) = $300. 00 (193. 772) x (1 + 0. 02) = $59,294. 23 Period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Quarterly Pay’t 300. 0 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 Interest 6. 00 12. 12 18. 36 24. 73 31. 22 37. 85 44. 61 51. 50 58. 53 65. 70 73. 01 80. 47 88. 08 95. 84 103. 76 111. 84 120. 07 128. 47 137. 04 145. 78 154. 70 163. 79 173. 07 182. 53 192. 18 202. 03 212. 07 222. 31 232. 75 243. 41 254. 28 265. 36 276. 67 288. 20 299. 97 311. 97 324. 1 336. 69 349. 42 362. 41 Total 306. 00 312. 12 318. 36 324. 73 331. 22 337. 85 344. 61 351. 50 358. 53 365. 70 373. 01 380. 47 388. 08 395. 84 403. 76 411. 84 420. 07 428. 47 437. 04 445. 78 454. 70 463. 79 473. 07 482. 53 492. 18 502. 03 512. 07 522. 31 532. 75 543. 41 554. 28 565. 36 576. 67 588. 20 599. 97 611. 97 624. 21 636. 69 649. 42 662. 41 Maturity Value 306. 00 618. 12 936. 48 1,261. 21 1,592. 44 1,930. 29 2,274. 89 2,626. 39 2,984. 92 3,350. 61 3,723. 63 4,104. 10 4,492. 18 4,888. 03 5,291. 79 5,703. 62 6,123. 69 6,552. 17 6,989. 21 7,435. 00 7,889. 70 8,353. 49 8,826. 56 9,309. 09 9,801. 7 10,303. 30 10,815. 36 11,337. 67 11,870. 42 12,413. 83 12,968. 11 13,533. 47 14,110. 14 14,698. 34 15,298. 31 15,910. 28 16,534. 48 17,171. 17 17,820. 59 18,483. 01 Period 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 Quarterly Pay’t 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 00 300. 0 300. 00 300. 00 300. 00 Interest 375. 66 389. 17 402. 96 417. 02 431. 36 445. 98 460. 90 476. 12 491. 64 507. 48 523. 63 540. 10 556. 90 574. 04 591. 52 609. 35 627. 54 646. 09 665. 01 684. 31 704. 00 724. 08 744. 56 765. 45 786. 76 808. 49 830. 66 853. 28 876. 34 899. 87 923. 86 948. 34 973. 31 998. 78 1,024. 75 1,051. 25 1,078. 27 1,105. 84 1,133. 95 1,162. 63 Total 675. 66 689. 17 702. 96 717. 02 731. 36 745. 98 760. 90 776. 12 791. 64 807. 48 823. 63 840. 10 856. 90 874. 04 891. 52 909. 35 927. 54 946. 09 965. 01 984. 31 1,004. 00 1,024. 08 1,044. 56 1,065. 45 1,086. 76 1,108. 49 1,130. 6 1,153. 28 1,176. 34 1,199. 87 1,223. 86 1,248. 34 1,273. 31 1,298. 78 1,324. 75 1,351. 25 1,378. 27 1,405. 84 1,433. 95 1,462. 63 Maturity Value 19,158. 67 19,847. 84 20,550. 80 21,267. 81 21,999. 17 22,745. 15 23,506. 06 24,282. 18 25,073. 82 25,881. 30 26,704. 92 27,545. 02 28,401. 92 29,275. 96 30,167. 48 31,076. 83 32,004. 37 32,950. 45 33,915. 46 34,899. 77 35,903. 77 36,927. 84 37,972. 40 39,037. 85 40,124. 60 41,233. 10 42,363. 76 43,517. 03 44,693. 37 45,893. 24 47,117. 11 48,365. 45 49,638. 76 50,937. 53 52,262. 28 53,613. 53 54,991. 80 56,397. 63 57,831. 59 59,294. 23 Page 14 of 14