Reference no: EM133119375

Time value of money is a basic, yet important, concept that is embedded in financial models. It is applied in a variety of situations. Here, we will examine your understanding of this concept in: (i) calculation of mortgage payments; and (ii) analysing education fees in future. 

(a) Suppose a couple in their early 30s is planning to buy a new HDB flat. The selling price of the HDB flat is $350,000. The couple has sufficient cash to make a down-payment of $35,000 (from CPF and other savings), and wishes to get a loan from HDB for the balance. The loan from HDB is a 25-year fixed-rate loan at 2.6% APR. Assume monthly compounding and that monthly payments begin in one month. While waiting to try their luck in the BTO queueing process, the couple also wishes to consider the possibility of buying from the resale market directly. Assume they can afford $2000 monthly payments and also go for a 25-year HDB loan at 2.6% APR.

Demonstrate your understanding of Time Value of Money, by calculating the monthly mortgage payment if they buy BTO flat directly from HDB; and figuring out what is the maximum price of a resale HDB flat they can afford, given their financial circumstances. 

(b) The couple is expecting a child shortly and wish to make plans to cover their child's overseas education in 18 years' time. Current fees are $7000 per annum and they assume these will rise at 5% per annum. The following table shows the amount of tuition fees for four years from Year 18 to Year 21.

The couple assumes their investments will earn 6% each year. Demonstrate your understanding of Time Value of Money, by analysing how much money they should contribute now if they plan to make equal payments starting next year for 17 years. 

(c) Identify three (3) groups of professionals who will build financial models, and explain why they do so.