MAP4C. Annuities and Mortgages Assignment.

Name_____________ Date________

PART 3. Questions 40-43. Problem Solving Questions Involving Personal

Finance. (Continued from last class.)
Answer all questions. Use additional paper as required and attach them to this report.
You may have to complete some of this work on your own time, using computers,
and/or the internet.
40. [Curriculum: Demonstrate an understanding of annuities used as long-term savings plans.]
a) What is an annuity? What is an RRSP?

[2 marks]

An annuity is a series of payments into, or out of, an account over a period of time. An
RRSP is a registered retirement savings plan used as part of a long-term retirement
savings plan.
[The Government of Canada offers an income tax deduction on contributions to RRSPs
during the current year as an incentive to encourage individuals to save for their own
retirement. Income tax is paid when the money is withdrawn from the RRSP. The
money must be withdrawn starting at age 71. At age 71, many people convert their
RRSPs into registered retirement income funds. These income funds provided regular
withdrawals over a period of time. The withdrawals are taxable in the year in which
they are made.]

MAP4C. Annuities and Mortgages Assignment. Name_____________ Date________

b) Problem: Using the annuity formula,

(
((

)( )
)

, show how to calculate the

monthly payment required to save $20000 over 5 years, in a savings account at

2.5%/a, compounded monthly.
[8 marks]

MAP4C. Annuities and Mortgages Assignment. Name_____________ Date________

(Curriculum: demonstrate, through investigation using technology (e.g., a TVM Solver [or financial tools online)], the
advantages of starting deposits earlier when investing in annuities used as long-term savings plans.)

41. Problem: If you want to have a million dollars at age 65, how much would you have
to contribute monthly into an investment that pays 6% per annum, compounded
monthly, beginning at age 20? At age 35? At age 50? Show your work. Write to explain
your reasoning. [10 marks]
Starting Age 20

Starting Age 35

Method 1: Use the annuity payment formula:

n= 540

Starting Age 50
(
(

)( )
)

FV = $1 000 000
i = (.06)/12 = 0.005

n = 360
FV = $1 000 000
i = (.06)/12 = 0.005

n = 180
FV = $1 000 000
i = (.06)/12 = 0.005

Pmt = $362.85

Pmt = $ 995.51

Pmt = $3438.57

Method 2: Use the TVM-Solver app [Select APPS-1-1 on the TI83 graphing calculator]
N = 540
I% =6
PV=0
PMT=-362.85
FV=1000000
P/Y=12
C/Y=12
Pmt: End/Begin

N = 360
I% =6
PV=0
PMT=-995.51
FV=1000000
P/Y=12
C/Y=12
Pmt: End/Begin

N = 180
I% =6
PV=0
PMT=-3438.57
FV=1000000
P/Y=12
C/Y=12
Pmt: End/Begin

Method 3: Use an online financial calculator. [Age 20 example is shown below.]

Example: www.mathinary.com/annuity_savings.jsp

Figure 1 http://www.mathinary.com/annuity_savings.jsp

MAP4C. Annuities and Mortgages Assignment. Name_____________ Date________

42.

[gather and interpret information about mortgages, describe features associated with mortgages (e.g., mortgages are
annuities for which the present value is the amount borrowed to purchase a home; the interest on a mortgage is
compounded semi-annually but often paid monthly), and compare different types of mortgages (e.g., open mortgage,
closed mortgage, variable-rate mortgage)].

Tasks: [5 marks]
a) Explain the difference between an open mortgage and a closed mortgage.
In general, an open mortgage allows the borrower to pay back the mortgage amount
early without any penalty. In general, a closed mortgage has a penalty for paying back
the mortgage early.
b) Explain the difference between a variable-rate mortgage and a fixed rate
mortgage.
Interest rates on a variable-rate mortgage may change from payment to payment.
Sometimes, the interest rate may increase or decrease which can cause your mortgage
payment to increase or decrease.
Interest rates on a fixed-rate mortgage do not change over the term of the mortgage.

c) State the compounding frequency used to calculate Canadian mortgages.

By law, a semi-annual compounding frequency is used to calculate Canadian
mortgages.

MAP4C. Annuities and Mortgages Assignment. Name_____________ Date________

[Curriculum: Read and interpret an amortization table for a mortgage]

43. Task: You purchase a condominium with a $25 000 down payment, and you
mortgage the balance at 6.5% per year, compounded semi-annually, over 25 years,
payable monthly. Use an amortization table to compare the interest paid in the first
year of the mortgage with the interest paid in the 25th year. Use a 5-year term. [10
marks]

a)
b)
c)
d)
e)
f)
g)

How much money was borrowed to purchase the house? $175000.00;

What was the purchase price of the house?.....................$200000.00;
How often must payments be made?....................................monthly;
How much money must be paid each month?......................$1172.19;
How much principal was paid in month 1? $236.86; month 12? $251.17;
How much interest was paid in month 1? $935.33; month 12? $921.03;
If, one year after the date of purchase, the house increase in value 3%,
determine the change in house value, and in net worth, due to owning the
house.[10 marks] Change in house value: $6000; Change in net worth from
$25000 to $31000 is 24%.