Assignment #2
Mackenzie (male or female), 33, is a single parent with two children 5 and 7. (S)he recently inherited $150,000. With this inheritance (s)he will pay down all or part of the mortgage, contribute to an RRSP, contribute to a TFSA, contribute to an RESP, and put the money in a non-registered or cash account. The money will be spread among all these loans and accounts and contributions must be made to all four accounts.
There are one mortgage and four investment accounts. The details of the mortgage and accounts are:
The outstanding mortgage amount is $110,000.
The RRSP contribution limit is $25,000.
The TFSA contribution limit is $20,000.
Because Mackenzie missed three years of RESP contributions, (s)he can use the
carry-forward provision for only one additional year to take advantage of the
Canada Education Savings Grant. The children are enrolled in a joint account.
Mackenzie can contribute any amount to the non-registered or cash account.
Youmustindicate how much, if any, of the inheritance you would use to pay down the mortgage. Also, youmustchoose an investment for each of the four accounts: RRSP, TFSA, joint RESP for the children, and the non-registered or cash account. Each account requires a different investment.
If you decide to pay a lot down towards the mortgage, your choice needs to make sense financially. You would need to consider if the reduction in the mortgage would allow Mackenzie to pursue other opportunities. You would also have to consider the interest rate of the mortgage compared to the rates of return Mackenzie could receive elsewhere.
When investing in each of the accounts, determine if the amount is needed in the short or long term. Typically, short-term investments are made in debt securities because of their low volatility. And long-term investments are made in equities because, in the long run, the return is far higher that with debt.
Investments can be made in Canadian or American securities. Your plan must show:
How you will allocate the cash among the different options that are available.
What debt or equity security you bought.
The price at which you bought it. If you are buying stocks, you must show the share price and the date of that share price. If you are purchasing American
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securities, calculate the cost in Canadian funds by looking at the exchange rate. You can go tohttp://www.xe.com/to calculate Canadian dollar amounts for many foreign currencies.
Give a reason for your purchase. If you were buying stocks, you would look at the stability of the investment, the expected long-term gain, the dividends paid by the company, the speculative quality of the investment, the diversity, and so on.
You can only buy stocks, bonds, mutual funds, or ETFs. You can also decide to have a portion of your portfolios as cash and not invested in anything. However, because this is an assignment about stocks, bonds, and mutual funds, youcannotbuy real property or any other investment that is not a stock, bond, mutual fund, or ETF.
After you have made your purchases, consider how difficult it was to do. What options do Canadians who have never studied investments have? And should there be a way to minimize investment risks for Canadians who are not familiar with investments? Savings for large purchases like buying a house,saving for children’s post-secondary education, and especially retirement can experience great risk in not being realized if errors were made in investments. Can you think of ways to minimize these risks?
Your answer should be about 1,000 to 1,500 words.
The mark for this assignment will be determined on how well you support your choices of investments. The mark will not be influenced at all by the performance of your investments. In other words, a well-supported investment suggestion for which the investments do poorly will receive a higher mark than a plan that is not so well supported but does have investments that do well.