MATH HUB 2 Flashcards
Deferred Sales Charge
Tammy is investing in a segregated fund and her advisor explained to her that there is deferred sales charge (DSC) on her investment. She would like to start with a deposit of $3,500.
Consult the fee schedule below and calculate what Tammy’s DSC charge will be if she withdraws her money in 4 years.
Tammy will owe a 1% fee, which will equal $35.
Refer to the row 4<5 years, since Tammy is IN year 4 but it is not yet year 5.
3,500 × 1% = $35
|REF. 2.3.2.2
Deferred Sales Charge
Abby just learned that her new segregated fund contract will have a 2.5% DSC charge.
She is planning to invest $7,800.
How much will she invest in her segregated fund?
The DSC is a charge subtracted when withdrawing money. Hence Abby will invest all of the $7,800.
Deferred Sales Charge
Five years ago, Greg started an RESP segregated fund contract for each of his two kids. He invested with two different advisors. He is now making a withdrawal.
For each child, Greg’s initial deposit was $2,000.
Subsequently, he made annual deposits of $1,500 to each account.
Advisor 1 negotiated a lower DSC for 5 years but there is a 1.5% sales charge for each subsequent deposit. Greg used this for his first child’s RESP.
Advisor 2 negotiated a higher DSC for 6 years but offered a 0% sales charge on each subsequent deposit. Greg used this for his second child’s RESP.
It is now year 4. Greg needs to withdraw his money. He has a DSC fee with Advisor 1 of 2.5% and a DSC fee with Advisor 2 of 3.25%.
- What are Greg’s total fees?**
Greg’s total fees are $538.75.
he total fees for Account 1 are:
DSC = $7,910 × 2.5% = $197.75
DSC + other sales fees = $197.75 + $90
= $287.75
The fees for Account 2 are:
DSC = $8,000 × 3.25% = $260
Greg’s total fees are
287.75 + 260 = $547.75
|REF. 2.3.2.2
Deferred Sales Charge
Alisha invested $10,000 in a segregated fund for her daughter Emily when she was born. The advisor explained that she would be charged a 5% deferred sales charge (DSC). Emily is now 4 and Alisha wants to withdraw $2,000 from the investment for her dance lessons.
How much will Alisha be charged for her withdrawal?
Alisha will be charged $100 for the withdrawal.
2,000 × 5% = $100
|REF. 2.3.2.2
Deferred Sales Charge
In 2013, Ang invested $5,500 in a segregated fund contract with a deferred sales charge (DSC). In 2015 he deposited $690. A year later, he deposited $560, and on that anniversary he deposited $780. His final deposit in 2018 was $1,900.
It is now 2019. If Ang withdraws all of his money, what are the total fees he will pay?
Ang would pay a total of $179.70 in DSC sales charges if he withdraws all his money in 2019.
(5,500 × 0%) + (690 × 2%) + (560 × 3%) + (780 × 4.5%) + (1,900 × 6%)
= 0 + 13.8 + 16.80 + 35.10 + 114
= $179.70
Management Expense Ratio
Maria invested in a segregated fund on which there is a 3% MER. She started with a deposit of $3,500.
If Maria’s investment grew by 9% over the year, what will her earnings be?
Maria will earn $210.
9% - 3% = 6%
3,500 × 6% = $210
Ref: 2.3.3
Management Expense Ratio
Jonathan just learned that his new segregated fund contract will have an MER of 2.5%.
If his investment drops by 3%, what will his actual loss be for the year?
Jonathan will lose 3% on his investment and have to pay the MER of 2.5%, for a total loss of 5.5%.
-3% - 2.5% = -5.5%
Management Expense Ratio
Tyler has a growing family, so he started an RESP segregated fund contract. He met with two advisors.
Advisor A offered a fund with a 3.5% MER.
Advisor B offered a fund with a 2.4% MER.
Tyler decided to try out both advisors and made an initial deposit of $1,000 into each option.
At the end of the year, the first fund had a return of $85. The second fund had a return of $59.
Investment with Advisor A earned…
Investment with Advisor B earned…
The investment with Advisor A earned $50.
- Return = $85
- MER = 1,000 × 3.5% = $35
- Tyler’s earnings = $85 – $35 = $50
The investment with Advisor B earned $35.
- Return = $59
- MER = 1,000 × 2.4% = $24
- Tyler’s earnings = $59 – $24 = $35
Management Expense Ratio
David invested $5,500 in a segregated fund contract with a 2.75% MER. It is now the 3rd year of the contract and the fund manager has notified David that the MER will be 3.25%.
David is wondering if the fund manager can do that. What is your advice?
a) The MER of a fund cannot be changed after the contract is signed.
b) The MER of a fund can be changed any time without notice.
c) The MER of a fund can be changed at any time by the insurer, but investors must be notified of the change.
The MER of a fund can be changed at any time by the insurer. Investors must be notified of the change.
It is essential that investors know what an MER increase will mean for future returns in dollars and cents, and not just on a percentage basis.
Annuity Rates
Luisa purchases an annuity contract with a rate of $5,500 per $100,000. She deposits $400,000 into the annuity.
What annual payments will she receive from the annuity?
Calculation: (400,000 ÷100,000) × 5,500= $22,000
REF 3.5.1
Annuity Rates
Sofia wants to purchase an annuity contract for her mother but she is not sure what the annual payments will be. She wants to deposit $500,000 and the annuity rate is $2,500 per $100,000.
What will her mother’s annual payments be?
Calculation: (500,000 ÷100,000) × 2,500= $12,500
Annuity Rates
Grace just retired and needs an additional $560 per month to cover her retirement expenses. She has decided to purchase an annuity with a rate of $4,000 per $100,000. She has $100,000 to deposit.
Will Grace receive the amount of money that she needs?
NO
(100,000 ÷100,000) × 4,000
= 4,000 ÷ 12
= $333.33
Annuity Rates
Farruko receives two payments from annuities he purchased.
The first annuity has a rate of $4,500 per $100,000 and he deposited $35,000.
The second has a rate of $2,750 per $100,000 and he deposited $25,000.
How much does Farruko receive in total?
Farruko will receive $2,262.50.
( (35,000 ÷100,000) × 4,500) + ( (25,000 ÷ 100,000) × 2,750)
= 1,575 + 687.50
= $2,262.50
Prescribed Annuity
Rithika invested $250,000 into an annuity contract with a 10-year term. She receives a monthly payment of $2,500. Of each payment $2,033 is capital and the remaining amount is interest.
If Rithika’s marginal tax rate is 36%, how much tax will she pay annually?
The answer is $2,017.44.
2,500 - 2,033 = $467 monthly interest
467 × 12 = $5,604 taxable amount
5,604 × 36% = $2, 017.44 tax due
She will pay $2,017.44
Prescribed Annuity
Nora purchased an annuity contract with a 15-year term. She has elected to receive monthly payments. She gets $1,560 of which $171 is interest. Nora’s marginal tax rate is 24% and she needs to receive $1,540 to cover her monthly expenses.
Will Nora’s after-tax payment be enough to cover her expenses of $1,540?
No, it will not be enough. Nora will be short by $21.04.
171 × 12 = $2,052 annual interest
$2, 052 × 24% = $492.48 tax due
492.48 ÷ 12 = $41.04
1,560 - 41.04 = $1,518.96
1,518.96 - 1,540 = -21.04
Prescribed Annuity
Carlos has three 10-year term annuities and expects to remain in the marginal tax bracket of 21% for the duration of all his annuities.
How much tax did Carlos pay in 2016?
How much tax will Carlos pay in 2018?
How much tax will Carlos pay in 2026?
How much tax did Carlos pay in 2016?
870 – 770 = $100 annual interest
100 × 21% = $21
In 2016, Carlos will only have to pay for the annuity he opened in 2015.
How much tax will Carlos pay in 2018?
2,390 – 2,000 = $390 annual interest
390 x 21% = $81.90
81.90 + 21 = $102.90
Carlos will pay tax on two annuities this year.
How much tax will Carlos pay in 2026?
1,050 – 900 = $150 annual interest
150 x 21% = $31.50
81.90 + 31.50 = $113.40
Carlos will pay tax on two annuities this year. The first is past term.
