Reference no: EM131695402

Question 1:

It's April 1st, 2017 and you want to buy a house. The housing market is spiking and you're hesitant to enter the market because of rumours that the market is a bubble that's about to pop. You have $200k saved for a downpayment but you decide to put off the purchase for one year to see if the market stabilizes. The bank manager suggests you purchase a 3 month CD that will pay you 0.4% annually (so 0.1% for the 3 months period). You ask him what can be done when the 3 months is over and he suggests that you repeat four times in a row to preserve your financial capital. You scoff at the suggestion and ask for another option. He suggests a one year bond. It pays 1.5% (so $1000 invested would return $1015 in one year). You ask about a 5 year bond and he says it pays a 2% yield (2% coupon rate). What about a 30 year bond. He says the newly issued 30 year bonds are paying 2.5% and you could always sell either the 5 year or 10 year bonds in the secondary market after a year has passed. You aren't impressed but you decide to go with the long-bond option.

On April 2nd (the next day) the BoC raises the bank rate by .25% (25 basis points). All the rates in the economy increase accordingly (including the rate on CD's). The BoC then continues to raise the bank rates by .25% every 3 month (so by the time a year has passed all the rates are 1% higher). Calculate how much you have saved for your house down-payment considering each of the five scenarios:

a) You bought the CD's: the 1st CD paid .1% for the first 3-month CD, then .35% for the second 3-month CD, then .6% for the 3rd, etc. : $ _____________

b) You bought the one year bond and held it until maturity : $ _____________