Subject Code: 333-101 Student ID Number: Assignment Name or Number: Assignment 1 Tutor name: Lucas Godwey Tutor day/time:

Wednesday/11 a.m 12 p.m

Subject Name: Finance I Student Name: Njoo Lidia Sulistia Wibowo

One have inherited $5,000 from a relative with the advice that it be used to start a share portfolio. In order to buy $10,000 worth of Westpac Banking Corporation shares using an on-line broker, he/she has to borrow $5,000. Thus, he/she needs to find the most suitable source to borrow the money. There are two alternatives sources which are margin loan and personal loan. Margin Loan The first available source is Margin Loan or Margin Lending. The example of the bank which provides margin loan is Commonwealth bank. Margin Lending is a way of borrowing money specially for investment. Therefore, it is different from usual bank loan. Its lending value is equal to market value times loan value ratio (LVR) divided by one hundred percent. Additionally, the LVR has to be between 30%-70%. There are several benefits of using margin loan. Firstly, the interest rate is quite small which is around 7% to 9% p.a. (Commonwealth Bank of Australia, 2009). Moreover, it provides access to several things. One may choose the type of interest between fixed and variable interest. Fixed interest margin loan can be paid in 3 months, 6 months, 9 months, 1 year, 2 year, 3 year or 5 year with a specified interest rate. On the other hand, by using variable interest margin loan, one may decide the term and the interest rate may vary every month. In addition, one is able to accommodate the loan to suit the necessity as portfolio grows. Also, if one choose to use apply fixed interest rate, he/she is able to claim tax deduction. Furthermore, if the capital gain is used for investment, capital gain tax can be avoided. Also, spreading the investments also may reduce the market and investment risk. Finally, the assets in margin loan is more liquid than others as most shares can usually be sold on business days. Thus, if one is in need of money, he/she may easily sell part or all of his/her investment. There is a disadvantage in using margin loan that is the risk when u get a margin call. Margin call is issued when the portfolio's lending value falls below the current loan balance due to the decline of the market. However, It gives a loan buffer of 5% of the market value of the portfolio. Therefore, if the portfolio falls below the lending value by more that the buffer, margin call will be issued. It needs

to be responded by the required time which is 2 p.m Sydney time on the day after the margin call (Commonwealth Bank of Australia, 2009). The gearing level has to be adjusted so that it is equal to or below the portfolio's lending value which can be done by several ways which are reducing the loan balance, increasing the portfolio value, and paying part of the loan. Reducing the loan balance can be completed by depositing money into loan account. Besides, increasing the portfolio value may be accomplished by purchasing extra shares which causes the increase in market value. Lastly, selling part of the portfolio in order to repay part of the loan. If there is no response within the required time, some or all of the securities will be sold to reduce the loan balance. The contribution one can make by using this loan is being aware of the portfolio value so that when it is below or within loan buffer, he/she may arrange the gearing level as soon as possible. Additionally, one needs to keep in touch so that when margin call is issued, he/she is well informed and can quickly response to it. This helps to reduce the risk of margin loan. Personal Loan Secondly, personal loan is also available. ANZ is one example of the bank which offers personal loan. Personal loan is basically borrowing money from bank with a minimum loan amount is $5000 and no maximum loan amount. There are several benefits of personal loan. Firstly, it provides two types of personal loan regarding their interest rate which are fixed-rate loan and variable-rate loan. Fixed-rate loan is offered with fixed interest rate while variable loan's interest rate could vary every month. Generally, fixed rate interest is higher than variable rate that is 13.89% for fixed rate and 13.40% for variable rate (ANZ, 2009). Therefore, personal loan gives facility to decide the suitable type of loan corresponding to particular conditions. Moreover, one is able to extend the payment duration in order to reduce the payments. There are several disadvantages of personal loan. The interest rate tends to be higher than the interest rate of margin loan. Furthermore, some documents such as proof of income and banking records are needed. Lastly, it is quite difficult to gain the acceptance to join this loan as a good credit rating is needed. By means of this loan, one may contribute in reducing the term period so that the loan interest payable is lower. If one is able to pay higher, he/she may shorten the term period.

According to information above, margin loan is a better source to invest money. This is due to the interest rate, tax deduction, criterion or standard to apply the loan, and the market risk. First, the interest rate of margin lending is lower than personal loan. Furthermore, deduction tax of capital gain can be brought forward using margin loan with fixed interest rate. This helps to reduce the amount of money which has to be paid. In addition, it is easier to apply margin loan than personal loan as no documents and good credit rating required. Finally, even though the margin lending is riskier, it might be minimized through In conclusion, there are several available sources to borrow money for buying Westpac Banking Corporation shares, namely margin loan and personal loan. Each of those has advantages and disadvantages. Throughout observing both sources, it can be concluded that the best source in this case is margin loan.

Bibliography ANZ. (2009). Personal Loans. Retrieved March 12, 2009, from http://www.anz.com/aus/personal/Personal-Lending/Personal-Loans/default.asp Commonwealth Bank of Australia. (2009). Margin Loan. Retrieved March 11, 2009, from http://www.commsec.com.au/Public/Products/MarginLending.aspx