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FINA1109 Managing Your Personal Finances Assignment – 2014
Background: Mandy enrolled in a Bachelor of Arts at UWA in semester one 2013, majoring in English and Cultural Studies. She is a fan‐fiction fanatic, loves to read and write anything sci‐fi with a goal of becoming a journalist by day and sci‐fi author by night. Mandy expects to take all her 24 units in the Humanities and expects to complete her studies in three years. Mandy is eligible for a HECS‐HELP loan and does not expect to be in a position to pay upfront and receive a discount.
In May 2014 the federal government announced proposals to change the indexation method on HECS‐HELP loan debts by replacing the Consumer Price Index with the 10‐year Government Treasury Bond rate. The proposals are to take effect with the indexation that is due on 1 June 2016 so there is much that could happen in between time to whether they actually do, and what the final rules are. So we are crystal ball gazing a bit, as we need to do, to investigate potential impacts. However, for the purpose of the assignment we are assuming the change does happen as described and on 1st June 2016 the new indexation rate (10‐year Treasury Bond) is used. NB. Nothing else changes in terms of how indexation is applied – just the indexation rate. The government may announce changes to the proposal before the semester is finished but we are going to stick with the above.
1. Aside from the proposals Mandy is confused. In July 2014 she asked the Australian Tax Office how much she owed as at July 2014. After she received her statement and saw her balance she wrote on her favourite fan‐fiction website blog that her HECS‐HELP debt balance had now grown and was more than the university originally charged her – at least compared with the cost of the units she had enrolled in. Another student has responded on the blog writing: “Don’t worry, the debt looks larger with indexation but in “real terms” it isn’t really”. She wanted to ask the blog poster what they meant by “real terms” but Mandy has a strict policy of not replying to posters who use emoticons.
a. Explain to Mandy what the poster meant and whether it is correct. Ensure you provide a clear explanation of any terms used. (max 200 words).
b. Explain to Mandy what a government treasury bond is. Explain whether these areconsidered a risky investment and whether we would expect the bond rate to be higher, lower, or the same as the inflation rate (max 200 words). (Q1 5 marks)
2. Now let’s jump forward. How much will Mandy owe by 31st December 2015 assuming each unit cost her $800 and we make the heroic assumptions:
a. The “old/current” rules on HECS‐HELP debt apply (CPI indexation) until that date, and
b. The indexation rate that is applied on each relevant date was/will be 2.6%. (Q2 5 marks)
3. One of Mandy’s major assignments in her final year focussed on Ernest Hemingway and shewas inspired to travel through Europe after her studies and retrace Hemingway’s journaliststeps some 100 year earlier. She ended up staying in Paris where in 2020, cue music, just sixmonthsbefore she planned on returning to Perth she met the love of her life Jack, who is alsofrom Perth, and they eventually return to Perth. With partner Jack she eventually arrives backin Australia for Christmas 2020.One of the unopened letters waiting for her is a statement of her HECS‐HELP debt from theAustralian Taxation Office with her balance as at December 2020.
So that we start off with the same debt number as at the end of her studies, ignore your answer to question 2 and let’s assume her actual HECS‐DEBT balance after she finished her studies in December 2015 was $20,000 which includes a final semester charge of $3,200. How much would the debt owing be in the letter (December 2020) if:
a. The rules had not changed and the consumer price indexation rate was used (as below), or
b. The rules do change and the 10‐year bond rate was used (as below).
Of course we don’t know what either rate will actually be. So let’s assume that history repeats and the same rates apply as they did ten years earlier. So for June 2016 use June 2006, June 2017 use June 2007 and so on. Below are the actual historical rates to help you calculate (a) and (b). Clearly show all workings.
CPI* 10‐year Bond Rate
Jun‐2006 3.21% 5.79%
Jun‐2007 2.96% 6.26%
Jun‐2008 3.37% 6.45%
Jun‐2009 3.12% 5.52%
Jun‐2010 2.32% 5.10%
Jun‐2011 3.11% 5.21%
Jun‐2012 2.30% 3.04%
Jun‐2013 2.28% 3.54%
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