Liquidity Risk:
a. Low liquidity risk - Onysha can easily access her investment as it is in the form of a Guaranteed Investment Certificate (GIC).
b. High liquidity risk - Steven's investment in the silver mine is not easily liquid as it involves a startup company and may take time for him to sell his shares and retrieve his investment.
c. Medium liquidity risk - Fred's investment in a vintage car may require time and effort to find a buyer and sell the car if he needs the money before the 20-year period.
Risk:
a. Low risk - Onysha's investment in a GIC is considered relatively low risk as it is a fixed return investment and guaranteed by the financial institution.
b. High risk - Steven's investment in a silver mine is considered high risk due to the uncertainty of the mine's success and potential fluctuations in the silver market.
c. Medium risk - Fred's investment in a vintage car carries some risk as the value appreciation may not materialize as expected, or there may be maintenance and storage costs associated with owning the car. However, it is not as risky as Steven's investment in the silver mine.
Rate the liquidity and the risk for each of the following items as either low, medium, or high.
(6 marks)
Liquidity Risk
a. Onysha invests $1500 in a 5-year GIC that pays 4% interest
compounded quarterly.
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b. Steven invests $2000 in a silver mine that is starting up near
to his hometown. They are promising investors a 10% return
on their investment in 5 years.
c. Fred has decided to invest in a vintage car that, according to
his research, will increase in value by 4% per year. He hopes
to own the car for 20 years and plans to pay $15 000.00 to
purchase it from someone in the community.
5 answers
. Two (2) years from now, Thomas will go to community college. He has figured out that college will
cost about $10 000.00. He decides to invest in a GIC that pays 6% interest per year and he
deposits $360.00 per month for the next two years to save enough money.
cost about $10 000.00. He decides to invest in a GIC that pays 6% interest per year and he
deposits $360.00 per month for the next two years to save enough money.
Liquidity Risk:
Low liquidity risk - Thomas can easily access his investment in the GIC after two years when he needs the money for college expenses.
Risk:
Low risk - Thomas' investment in the GIC is considered relatively low risk as it offers a fixed return of 6% per year and is guaranteed by the financial institution.
Low liquidity risk - Thomas can easily access his investment in the GIC after two years when he needs the money for college expenses.
Risk:
Low risk - Thomas' investment in the GIC is considered relatively low risk as it offers a fixed return of 6% per year and is guaranteed by the financial institution.
. Two (2) years from now, Thomas will go to community college. He has figured out that college will
cost about $10 000.00. He decides to invest in a GIC that pays 6% interest per year and he
deposits $360.00 per month for the next two years to save enough money.
a. determine the amount of
money Thomas will have saved at the end of the
2 years.
b. Does Thomas have enough saved?
cost about $10 000.00. He decides to invest in a GIC that pays 6% interest per year and he
deposits $360.00 per month for the next two years to save enough money.
a. determine the amount of
money Thomas will have saved at the end of the
2 years.
b. Does Thomas have enough saved?
a. To determine the amount of money Thomas will have saved at the end of the 2 years, we need to calculate the future value of his monthly deposits into the GIC.
The monthly deposit is $360 and he will make this deposit for 2 years.
Using the formula for the future value of an ordinary annuity:
FV = P * [(1 + r)^n - 1] / r
where FV is the future value, P is the monthly deposit, r is the interest rate per period, and n is the number of periods.
In this case, P = $360, r = 6% or 0.06 (converted to decimal), and n = 2.
FV = 360 * [(1 + 0.06)^2 - 1] / 0.06
= 360 * [(1.06)^2 - 1] / 0.06
= 360 * [1.1236 - 1] / 0.06
= 360 * 0.1236 / 0.06
= $741.60
Therefore, at the end of the 2 years, Thomas will have saved $741.60.
b. No, Thomas does not have enough saved. The cost of college is $10,000, but he will only have saved $741.60. Therefore, he still needs to save additional funds to meet the cost of college.
The monthly deposit is $360 and he will make this deposit for 2 years.
Using the formula for the future value of an ordinary annuity:
FV = P * [(1 + r)^n - 1] / r
where FV is the future value, P is the monthly deposit, r is the interest rate per period, and n is the number of periods.
In this case, P = $360, r = 6% or 0.06 (converted to decimal), and n = 2.
FV = 360 * [(1 + 0.06)^2 - 1] / 0.06
= 360 * [(1.06)^2 - 1] / 0.06
= 360 * [1.1236 - 1] / 0.06
= 360 * 0.1236 / 0.06
= $741.60
Therefore, at the end of the 2 years, Thomas will have saved $741.60.
b. No, Thomas does not have enough saved. The cost of college is $10,000, but he will only have saved $741.60. Therefore, he still needs to save additional funds to meet the cost of college.