I thought they also inherited a windfall? PMT should be positive.
> Also the second rate is much higher for me.
> I roughly remember the numbers
> PV = 10,200,000
> N = 5
> PMT = -55000
> FV = -15,000,000
> so I = 12.xx%
> That’s why i add the crap like they should adjust
> their desire to leave huge money to their kids
> upon death in the return objective. It looked
> funny to me when i put those crap on the answer
> sheet, since i had no clue.
> i got 8.4%
> pmt is a positive 55K no?
I got 8.4% as well.
Here 55k is withdrawn from portfolio, it’s definitely negative as same as FV.
payment is negative. 100%. i was wondering why everyone got a different answer than me
There are only two tragedies in life: one is not getting what one wants, and the other is getting it - Oscar Wilde
no because they are “paying” that out. run it both positive and negative and you will notice the interest rate is higher for positive.
think about it. i give you 100,000 and ask that you give me 5,500 per year and 150000 at end of 5 years.
> L2 Candidate Wrote:
> > Cannot 100% remember.
> > If someone had assets of 500,000, then received
> > 750,000 but decided to put 30% down on a
> > home (255,000) they would have 995,000 left.
> > If they needed 55,000 per year - return would
> > 55,000/995,000 = 5.52%
> > Adjust for inflation (assuming it would be an
> > unhealthy rate of 4%)
> > 1.0552 x 1.04 - 1 = 9.74%
> I might be wrong. But I subtract the first 55000
> payment from the asset base, so my return is
> 55000/94000 = 5.85%
> On the way home, i thought about the 4% inflation
> adjustment, and got confused. I did the
> adjustment, but i am so sure now, since 55000 is
Asset base was fixed within at most a month, first payment was due in a year.
positive or negative is not important. Important is that it has the same sign as FV and opposite to PV.
> positive or negative is not important. Important
> is that it has the same sign as FV and opposite to
yes same aign as FV and opposite to PV.
> think about it. i give you 100,000 and ask that
> you give me 5,500 per year and 150000 at end of 5
i did a schweser question and put the payment as negative and got the wrong answer because it wan’t positive. run the two in your calculator. the one with the positive payment has the higher interest rate which is obviously right since you need a higher return to pay the mortgage.
Anyone subtract 55000 from the asset base? Did the question ask about the return for the next year?
no it said down payment is paid by the distribution and the portfolio would have to generate the mortgage payments
No. I made the same mistake.
So the question is return for this year? OK. i will fail for sure.
> yep, 9.74% and 8.48% is what I got as well. I put
> arithmetic 9.52% on the first one as well just to
> be extra safe.
Those are what I got except I added inflation to the second number. I totally missed the footnote. Here’s to hoping I only get docked a point or two for that. Feels good to know other people are coming up with same answers.
This sounds familiar to me too, great googly moogly.
ok an example
n=10 PV=-1,000 PMT=5 FV=2,000
cpt I = 7.55%
n=10 PV=-1,000 PMT=-5 FV=2,000
cpt I = 6.8%
obviously you need a higher interest rate to pay the mortgage, not lower.
> ok an example
> n=10 PV=-1,000 PMT=5 FV=2,000
> cpt I = 7.55%
> n=10 PV=-1,000 PMT=-5 FV=2,000
> cpt I = 6.8%
> obviously you need a higher interest rate to pay
> the mortgage, not lower.
geez dude chill it. whatever the sign of FV is the sign for PMT. they can both be positive or negative with the same answer in the end,.
i grossed up for inflation hopefully they give decent partial credit….did the correct calc just took it one step too far
^ why didnt you have to gross up the inflation on the second part… did they say the 15mm was adjusted for inflation already?
Inflation first part because they need to maintain real value to live the same way in retirement. No inflation in 2nd part because your just looking at the return needed to get to $15 million. Don’t gross up for taxes in first part: amounts were stated as after-tax salaries. I think 1st part answer was like 9.5%. 2nd part was like 7.55.
I can’t remember did the question ask for the nominal pre-tax return or the nominal after-tax return. I completed after tax first and then corrected it to pre-tax, but now I am getting worried.
15 million in todays dollars or future dollars, I took it as future dollars but whatever it is probably wrong, I got the rest correct so hopefully not much pts off.
you have ~10M today, you need 15M nominal in 5 yrs, pay 55k nominal each year. solve for I. inflation adjustment should not enter into picture at all.
thats how i interpreted it. i had a panic moment when they first threw that 2nd return calc at me, i wanted to slap them. but then i realized it was a short simple calc, or famous last words as they say…
> volkovv Wrote:
> > yep, 9.74% and 8.48% is what I got as well. I
> > arithmetic 9.52% on the first one as well just
> > be extra safe.
Agree. Fantastic .. I thought for sure I forgot to adjust for something in this thing. SO much to read for so little info. Why did they give the tax rates for ?
Did they ask for after-tax or pre-tax in 2nd part, or no mention at all?
everything was given after tax and they were asking for after tax. even the distribution was tax free.
on the first part,
i took out the 255k and 55k as liquidity needs from asset base. living expenses were anyway covered month-month by salary (altho you can argue they needed a 3 mos buffer or something - not mentioned in the case, so i hail mary’ied and ignored it)
the inflation adj was reqd - but not because of the fixed mortgage, but to preserve the asset base in real terms. but the kink is - they only said they wanted to preserve real value of 500k. the 1st trust distn, they arguably could have eaten into principal, so once again, arguably this could be a very very long, complex calc if you really want to get it exactly right.
hail mary pass, one after another for 3 hrs. like playing the last 2 minute warning, for the whole game without timeouts or quarter breaks…ridiculous.
SO shouldn’t 2nd part return be 7.55%? The payment is an outflow from the portfolio so sign should be negative. The sign does make a difference.
i think i got 9.75% or something close to that….
AnalystForum is an online community designed exclusively for CFA candidates and charterholders to discuss the Chartered Financial Analyst program.