What Interest Rate Should I Recommend for my Client? Assignment | Interest Rate
Important Note: use the following link for Canada’s consumer price index (inflation rate) : https://www.bankofcanada.ca/rates/indicators/key-variables/key-inflation-indicators-and-the-target-range/
use the following link for Bank of Canada interest Rate Tracker: https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/
Assignment #1 – What Interest Rate Should I Recommend for my Client?
Overview
In Topic 2.1 we saw how short-term interest rates are determined through the Bank of Canada. Then, in Topic 2.4, we learned how inflation impacts interest rates. Finally, in Topic 2.7, we observed how the Bank of Canada’s monetary policy affects interest rates.
With that knowledge, you are now better equipped to look ahead to see what impact that the information you leaned in those three objectives will have upon an important decision that one of your clients, will need to make:
What type of interest rate and what level of interest rate do I help my client choose when the details of a mortgage have to be completed?
Length: Typically, about 3 pages, with graphs and charts included.
Style: Essay or point-form (you decide).
Resources That You Will Need
First, for some historical information:
- Canada’s consumer price index (inflation rate): http://www.statcan.gc.ca/subjectssujets/cpi-ipc/cpi-ipc-eng.htm
Click on the link and save or print the chart.
- Bank of Canada Bank Interest Rate Tracker: http://www.bankofcanada.ca/en/rates/interest-look.html
Click on the link and enter information from the same period as the inflation rate.
When you arrive at this website, look at Section 1: “Specific Date or Range”.
o Your Start Date should be entered as: 2010 – 01- 01 (January 1, 2010)
o Your End Date should be entered as: 2012 – 02 – 01 (February 1, 2012)
Look under the heading: “Monetary Policy and LVIS Statistics” and, on the line entitled “Bank Rate” click on the box that is numbered: V122530, under the “Monthly” column. Then scroll down along the left side margin and click on to the box entitled: “Submit”. Print off or save the pages.
Next, you will need to visit the following website for current information: http://www.tdcanadatrust.com/products-services/banking/mortgages/mortgage-rates.jsp
- The information that will appear will be the current “posted” mortgage rates that are offered by the TD Canada Trust for Fixed Rate and Variable Rate mortgages.
- Save or print off that page.
Questions
Reflecting on the learning material that you have read, about the nature of interest rates, inflation, plus information that you have no doubt seen in the media over the last nine months proceed to answer the following questions. Submit your answers in a Word document to the Assignments area of your course.
Question 1 (5 marks)
Tell us what is likely, in your opinion, going to happen with the direction of short-term interest rates in the immediate future (the next 3 months). Will they fall, stay where they are, or rise? Give us your reasons for the opinion that you developed.
Marking Criteria
You have the freedom to use information from sources that you research and obtain from the financial media, information from news and business journals, and also from web-based information from recognized sources (blogs do not count as “recognized sources”, no matter whose blog it is).
References to material that you used to answer any question must be included at the end of each answer so we can determine where you sourced your material.
To earn a mark, you will need to provide a piece of information that will help to support your opinion. For example, if your answer is structured like this:
“In my opinion, interest rates should, for the next 90 days, remain at current levels because of the following three reasons:
- a) your reasoning, with a supporting fact
- b) your reasoning, with a different supporting fact
- c) your reasoning, with another supporting fact”
then you could expect to earn three marks, if each reason has adequate supporting information. Linking your response to information provided in Topics 2.1, 2.4, and 2.7 can be of value to you.
You should base your opinion upon factual observations, not a “gut feel”. Having said that, economists are known for giving a response to a question, then ending their response with: “…on the other hand” and then providing another alternative response that is often based on their “gut feel” or some internal voice speaking to them from experience. You have permission to do that, but only after you have given your fact-based opinion.
Question 2 (10 marks)
Using information that helped you to form the opinion expressed in your response to Question 1, what would you suggest to a client who requires mortgage financing in the amount of $350,000? Should they stay “open” and let their mortgage “float” with changes in interest rates by using a variable rate mortgage, should they “lock-in” and fix the interest rate, term, and amount, or are there other alternatives that you might recommend?
Marking Criteria
To earn a mark, you will need to provide a piece of information that will support your recommendation. Linking your response to information provided in Topics 2.1, 2.4, and 2.7 can be of value to you in this question as well.
You will also be eligible to earn marks if you use the mortgage calculator at the bank’s website to create examples, and build arguments, for open, closed, fixed, or floating interest rates.