## Bart to help him out to raise more

Bart Simpson started to save some money 15 years ago with the objective to buy a new house in Beverly Hills area.  He decided to deposit 120 euros per month into a new savings account that yielded 2.50% p.a. compounded quarterly. In addition, Homer his father, wanted to help him out to raise more money by depositing 6,000 euros a year in his son savings during 15 years (starting this operation at the same time Bart opened his savings account). Five years later Bart got a job on Wall Street as a Financial Analyst, so he saw the opportunity to increase his savings even more and decided to deposit 17.5% a month of his monthly salary (making these deposits for the next 10 years). In average, Bart earned 2,400 euros per month. How much has Bart accumulated in his savings account for 15 years? How much did he earn from interests? What is the effective interest rate of this operation?Then just as he planned to save for 15 years Bart decided to withdraw all money from his savings account, but he is not actually sure whether to buy a new house or rent an apartment.The rent for the apartment is 1,050 euros a month. The market price of the new house is 450,000 euros, but he only has what he got from all his savings, so he could take on a mortgage for 30 years.He has collected all mortgage data from two different local banks to analyze the cost of borrowing in order to find the most attractive alternative:Some other fees to be included in these two mortgage options are:Registration expenses (195.2 euros), management expenses (435.6 euros), valuation expenses (695.75 euros) and documented stamp duty “taxes” (9,174 euros). All these fees to be paid when contract is signed.Real estate insurance (134.29 euros/year) – first payment after 1 yearLoan repayment insurance (4,290.55 euros) – to be paid in N periods until maturity (e.g. if contract years is 20 and frequency of payments is semi-annually then every period we will pay 107.27 euros = 4,290.55 / 20*2)Besides mortgage fees there are some community fees of 500 euros a month payable by the owner. House prices expected to rise at 1.20% a year.How much does Bart have to borrow on the mortgage? What is the effective cost of each mortgage alternative? What is the payback period (from the Bank position)? Which is the most attractive alternative? Would you recommend Bart to buy the new house or to rent an apartment? Why?What would happen if Bart decided to invest all his savings into a Government Bonds instead of purchasing a new house?Assume Bart got only 4 Gov. Bonds options on his final list: (consider a Nominal value = 100 euros).What’s the most attractive option? What’s the theoretical value of each bond?If the required rate of return of Bart was 2.7%, would you suggest he invests on any these bonds? If so, which ones?Assuming he goes for the most attractive gov. bond. How many bonds can Bart buy with all his savings? Would you still keep the same recommendation? (buying or renting)Finally, if he decides to deposit every payment (coupons) he is receiving into a 30 yrs. retirement account that yields 2.80% p.a compounded monthly:How much will he be accumulating after 30 years?What would you suggest Bart to do? (buying or renting)

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