Download FINANCIAL PLANN ING PRACTICE N OV 2011 SOLUTIO NS

INSTUTITE OF BANKERS IN MALAWI
DIPLOMA IN BANKING EXAMINATIONS
SUBJECT : FINANCIAL PLANNING AND PRACTICE (IOBM-D210)
NOVEMBER 2011 SOLUTIONS
QUESTION ONE
Recommended answers
a. This is a case where a person dies without leaving behind a will (2 marks)
b. Deemed property refers to property that in not included in the assets of an
individual for tax purposes but forms part of his estate.
(3 marks )
c. Cost averaging- is a method investors can use to reduce the risk of paying
dearly for an assets whose value is dropping. By buying small units over a
long period, the average cost will remain low as compared to someone who
simply makes one lump sum payment. The result of the cost of the larger
number of lower priced units will assist to bring the average cost down.
(10 marks)
QUESTION TWO
Recommended answers
a) Policies that are exempt from forming part of the deceased estate
1. Policies whose proceeds are payable to the surviving spouses or child of
the deceased in terms of registered ante-postnuptial contract.
2. Policies whose proceeds are payable to a partner of the deceased
provided that the purpose of the insurance was to enable such partners to
acquire in whole or in part the deceased shares in the partnership.
3. Proceeds of a policy payable to a shareholder of a company is the
deceased was also a shareholder of the company.
b) A Postnuptial agreement is a written contract executed after a couple gets
married or have entered into a civil union to settle the couples affairs and
assets in the event of a separation or divorce.
c) The significance is that such agreements would stand in favour of the
surviving spouse in the absence of a will. This is more especially where the
couple was on separation or divorce.
QUESTION THREE
Recommended answers
a) Situations where a prospective client will be referred to a re-insurance
company
1. Substandard Risks – in case where the insured is suffering from
medical impairment
2. Retention Limits – where the sum assured exceeds a certain limit
as defined within its company guidelines
3. Hazardous risks – due to the nature of work or hobby in which the
insured is found to be
b) Brief notes:
1. Facultative re- insurance – when an insurer shops around to get
the best deal with a re-insurance company.
2. Treaty Re-insurance – where insurance enters into an agreement
to place part of their business of a particular nature with the
specific re-insurance company only.
QUESTION FOUR
Recommended answers
a) Risk elements to bear in mind
1. Risk inherent in any investment
2. The level of risk which the client is prepared to accept - otherwise known
as risk tolerance.
3. The term to maturity for the investment in question
b) The rule of 72 and cost averaging
i. The rule of 72 – This rule gives the timeframe when the purchasing power of
money will drop to half what it is able to buy now. This rule is also used to
project when an investment will grow to double the nominal value given a
rate.
ii. In the problem the workings are simply 72/9 = 8. MK100,000 invested today
will grow to MK200,000 after 8 years assuming the interest rate remain the
same.
QUESTION FIVE
Recommended answer
1. Last expenses- this covers funeral expenses, hospital and
medical expenses, legal fees and estate duty.
2. Short term expenses – outstanding debts and current bills,
sufficient income for surviving dependants usually calculated
to cover one year
3. Long term Requirements- supplementary income to cover
dependency period, provision for tertiary education for
children , any other amounts owing for mortgages, hire
purchase and adequate provision for retirement
4. Acquired assets – both liquid and fixed assets should be
considered as a deduction ie funds available to arrive at a
final figure.
While the above would be focusing on how much should be invested over the
period, the alternative option of a life policy would adequately suit someone
providing for retirement other than just looking at surviving dependants.
QUESTION SIX
Recommended answer
i. An annuity – the policy holder buys a lump sum with the option to get
regular amounts for over a period. Since Mercy is currently providing for
her daughter, the annuity can be determined to start giving the regular
sum at the attainment of a certain age.
ii. Comparison of annuity and endowment.
-They can both be used for investment and therefore grow with interest earnings
- Upon maturity of an endowment, one can further invest by purchasing an
annuity.
- The capital sum in an annuity is not taxed because its personal income which was
already taxed –only interest received is taxed. Similarly, the monthly premiums in
an endowment policy are treated as coming from income and therefore taxed
unlike life policy premiums which are tax exempt.
- An endowment policy has a maturity date and cannot be used as a life cover and
so too is an annuity
iii. The rule of intent in determining whether profit from a sold asset should be
taxed or not states that the guiding principle should be the intention for which the
asset was acquired. It bought for resale, then its income subject to taxation
otherwise if sold because it’s now obsolete then its capital gain for which income
tax is not applicable
QUESTION SEVEN
Recommended answer
A person is entitled to benefit from both parents regardless of being an illegitimate
child.
Jonathan would still be accommodated as a beneficiary because his position is not
affected by his illegitimacy.
It must be in writing though exceptions of oral wills are acceptable in given
situations
Every person above 18 years can create a valid will
Testator must sign in the presence of another person. Witness cannot sign using a
mark.
Competent persons must witness the will – 14 years and above.
Witness must attest in the presence of the testator
Where a will has more one page, each page must be signed by all parties.
If testator signs using a mark, a certificate of confirmation from the commissioner
of oaths is required
QUESTION EIGHT
Recommended answer
a) The features that need to be considered include the following. Investments
must be well spread so that an investor does not lose out completely because
of adverse movements in one particular market or portfolio.
1. Risk versus term – long term investment usually carry low risk
2. Liquidity – emphasis on highly liquid investments will yield low
returns
3. Equity vs Cash or guaranteed portfolio such as preference shares –
equities can be highly volatile, therefore high exposure means high
risk. Guaranteed portfolios give exposure to lower risk but provide
relatively low return
4. Return versus Risk – the higher the return the higher the risk
5. Diversification – regardless of current behavior of certain assets in
terms of returns, concentration on assets in on type of investment
assumes high risk
b) Five different types of investment portfolios include the following
1. Conservative portfolio – seeks capital preservation but lacks growth
potential
2. Prudent portfolio – seeks to get current income combined with capital
preservation
3. Moderate portfolio – seeks current income combined with capital
growth
4. Venturesome portfolio – concentrating on capital growth
5. Aggressive portfolio –seeks high returns and takes a long term view