# 1. What is the monthly loan payment required to pay off the $600 balance in one year?...

## Question:

2. To what amount will the single $1000 contribution grow over the next 20 years if your RRSP earns 6% compounded monthly?

3. What monthly RRSP contribution will have the same after-tax cost to you as the monthly loan payment calculated in Question 1?

4. Suppose you make these monthly RRSP contributions. What amount will you have in the RRSP just after the twelfth contribution?

5. To what future value will the Question 4 amount grow over the subsequent 19 years?

6. The future values calculated in Questions 2 and 5 are the amounts in your RRSP 20 years from now under two alternatives that have the same cost to you. Comment on the outcome. What is your response to the question in the case’s title when the interest rate on an RRSP loan is the same as the rate of return earned by your RRSP investments?

7. Suppose the RRSP earns 9% compounded monthly instead of 6% compounded monthly. Answer Questions 2, 4, and 5 again. Should you borrow for the RRSP contribution in this case?

8. What will be the nature of the outcome if the rate of return earned by the RRSP is less than the interest rate on the loan?

9. Summarize your findings as a general decision criterion. (Under what circumstance should you borrow to make an RRSP contribution?)

## Step by Step Answer:

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