Explain the relationship between risk and return with regard to investment.

Raising Individual Financial Awareness (U50013)
U50013 Coursework Semester 1 2015-16

Coursework 3 – Individual Report – total 85% of the module.

Write a report for Mr and Mrs Murray and family addressing the following points. All questions indicate the marks available, with a further five marks for presentation and evidence of relevant research.

1)
Fred has just won a recording contract and has received an advance of £10,000. He wants to invest this money in some way, but is not sure how. He is prepared to consider anything ‘safe’.
(a) Explain the relationship between risk and return with regard to investment. (5 marks)
(b) What questions would you ask Fred in order to clarify how he would like to invest his £10,000. What impact would tax have on your advice?
(5 marks)
(c) What is an ISA? Should Fred consider investing in one? (5 marks)
15 marks

2)
Anne Murray has just received a legacy of £55,000 from her aunt. She is considering buying a property costing £250,000 in Woodstock for rental purposes. She will use her legacy as a deposit, but will need to borrow the remaining amount for the purchase.
She has asked you to research and find a suitable buy-to-let mortgage, a real product. Local agents have estimated that the monthly rent may be £1,200 per month, with 10% of rent charged as agent’s fees for managing the property. Other costs are estimated as follows:
Repairs and maintenance per annum £625
Insurance per annum £395
Other monthly costs £80
Required:
(a) Find a real buy-to-let mortgage for Anne and calculate the net annual income that Anne could expect from her property, shown in columnar format. (8 marks)
(b) Calculate the potential annual rental yield on her investment. (2 marks)
(c) Anne might consider selling the property in the future. Illustrate for Anne what the potential capital gains tax on the sale would be if she sells the property for £300,000? You can use the allowances and rates for 2015/16 to illustrate her position, and you should estimate costs that she may incur. (5 marks)
(d) Explain to Anne the risks involved with investing in property. (5 marks)
20 marks

3)
Fred Murray (the musician) has recently opened his own retail shop selling musical instruments. He closes accounts on 30 June each year. His profit for the year to 30 June 2015 was £12,700 after having deducted the following expenses:
• Entertainment to foreign customers £1,500 (of which £350 was for entertaining his own family)
• Penalty fees for non-submission of tax return £650
• Light and heat £2,250 (of which 20% was for private use)
• Painting of the interior of the musical shop £1,550
Fred has investments on the London Stock Exchange, earning dividends of £1,890 (net). He also holds two savings accounts, a cash ISA earning £450 as interest and a deposit account earning £1,280 (net) as bank interest in the tax year 2015/16.
On 1st July 2015, Fred was appointed as a musician in a famous hotel earning £28,800 as a basic annual salary plus a monthly bonus of £250 for good performance during the 2015/2016 tax year. He received a diesel car with CO2 emissions of 174 g/km (list price £38,000) from his employer. Accessories added to the car cost a further £4,000. Fred’s employer pays for all the fuel for his car.
Required:
Calculate Fred’s income tax due for the year 2015/16. (21 marks)
Calculate Fred’s National Insurance liability on his self-employed income for the year 2015/16. (4 marks)
25 marks

4)
The Murray family have been having the following conversations with each other and have asked you, as their financial advisor, what your understanding of these situations is.

Required:
Prepare a list of your responses to the following statements and provide a brief discussion or calculation to support your answer:

(a) Fred has just started his new job with an annual salary of £28,800, and is now thinking of buying a house. After tax and National Insurance is deducted his take-home pay is £22,670. The mortgage company will not take into account his bonus or his self-employment. How much can Fred afford to pay in monthly mortgage payments?
If interest rates are 5% and Fred takes out a 25-year mortgage, the monthly payment for £100,000 loan would be £584.60. How much could Fred actually afford to borrow? 5 marks

(b) A friend of Anne, who helps make wedding bouquets, says there are at least two ways of jointly owning property in this country. She says that this affects the inheritance of a home when someone dies. Is this true? Anne knows she owns their home with Henry jointly, but is not sure of the details. Who will inherit the property when one of them dies?
5 marks

(c) Bill’s boss Joe has lived with his partner, Jane, for eight years. They have two children, Benedict (aged seven) and Sandra (aged five). Joe has a grown-up son, Hugh, from a previous relationship. Joe says there is no need for him to make a will because Jane is his ‘common law’ wife and would inherit everything, just as a wife would. Is this true? If Joe died intestate, who would inherit his estate? What could Jane do? 5 marks

(d) Henry also received a legacy from Anne’s aunt, of £10,000. He is considering investing it and is comparing two funds, both of which offer 6% returns. The first one is a managed fund with 2% charges every year; the other is a tracker fund with a 1% initial charge and 0.3% annual management charges. Calculate the returns from both funds over a ten year period. 5 marks
20 marks

Write a report of a maximum of five pages, ie, 5 sides (excluding appendices and bibliography), font size 11, Arial, and 1½ line spacing, addressed to the Murrays dealing with the above queries.

This report should be referenced in accordance with the Harvard style of referencing. You can use text books or the internet to carry out your research but you must reference your sources of information. Marks will be awarded for good research, presentation and clear communication skills.

The deadline for the coursework is Thursday December 10th, 2015. The completed assignment, including a coursework cover sheet, should be posted into the appropriate undergraduate drop box in the Simon Williams building.

Your work will be returned in the following semester, with feedback. The purpose of providing feedback is to help improve future assignments, so please do collect your work promptly.

Late submission of work

Students who submit work late will receive a mark of ZERO for that element of assessment.

If mitigating circumstances (for example, medical or personal circumstances) affect your ability to meet an assessment deadline then it is ESSENTIAL that you notify your module leader as soon as possible and in any case BEFORE an assessment deadline. You will be required to provide satisfactory documentary evidence to support your claim.

If you submit a claim of mitigating circumstances later than an assessment deadline, then you will not only need to demonstrate that you were affected by these circumstances but you will also need to provide evidence that you were unable to submit your claim by the deadline.

For further details of the University’s regulations for the consideration of mitigating circumstances please see:
http://www.brookes.ac.uk/services/asd/registry/mitcircs.html

Assessment criteria U50013 2015/16 Semester 1 coursework.

Student number:

1)
Has the relationship between risk and return been well covered?
Have helpful questions been compiled to address Fred’s situation?
Have the tax implications been covered?
Have ISAs been explained and Fred recommended to invest in one?
15 marks

/15

2)
Has a real mortgage been found?
Is the rental income carefully and accurately calculated?
Return on investment calculated?
Has the potential CGT on a sale been illustrated for Anne?
Have the risks been well explained?
20 marks

/20

3)
Is the income tax computation carefully and accurately calculated?
Has Fred’s NI on his self-employed income been calculated correctly?
25 marks

/25

4)
a) Has how much Fred can afford monthly, and how much the lender will let him borrow, been accurately calculated?
b) Have methods of property ownership and affect on inheritance been well addressed?
c) Has inheritance by common law wife been discussed? Who would inherit? What alternatives are there?
d) Have ten-year returns on the two investments been accurately calculated?
20 marks

/20

Is the work well presented and has some good research been carried out?
5 marks

Total mark