PV should be negative: you are funding the portfolio (an outflow)
Pmt is negative: what flows out of the portfolio
FV is positive: what you have left or “get back”
That inflation adjustment is what killed me. I read it and thought “is this saying only protect the 500k from inflation? that makes no sense, I must be reading it wrong” apparently I wasn’t
-5 right there
rohufish Wrote:
——————————————————-
> 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.
jimmylegs Wrote:
——————————————————-
> Mo34:
>
> I may be wrong, but I thought:
>
> PV should be negative: you are funding the
> portfolio (an outflow)
> Pmt is negative: what flows out of the portfolio
> FV is positive: what you have left or “get back”
think of it like making an IRR calculation. you put your original investment in one sign and all the cash flows you will be getting in another sign.
Shoot. lost some points here based on this nuance. This goes back to freshman year undergrad and I missed it. Hopefully they don’t take off full points because of this.
55k was the pymt needed after tax, did anyone adjust that for pretax to get the return req part? I think my answer was still around 9.45, but i had a pymt of 68750 or something…
hala_madrid Wrote:
——————————————————-
> yep, i went with average… there were some small
> nasty details… although I guess not important
> enough… i think i got this wrong
Average risk– No extra discretinary income and portfolio is paying the mortgage…..at the same time a second 750 coming in 10 years helps out.
we all did mental accounting. again watch as i never touch a question’s specifics:
lets say i make 100K and my expenses are 100K. i have a mortgage that is 3K a month ` 36K annual.
by mental accounting i start thing, oh i got my expenses covered. i only need to take care of mortgage from my portfolio. i am looking at mortgage different from my living expenses.
hence mental accounting.
There are only two tragedies in life: one is not getting what one wants, and the other is getting it - Oscar Wilde
jimmylegs Wrote:
——————————————————-
> Mo34:
>
> I may be wrong, but I thought:
>
> PV should be negative: you are funding the
> portfolio (an outflow)
> Pmt is negative: what flows out of the portfolio
> FV is positive: what you have left or “get back”
Nope….Payment has to be the same as the FV, whatever sign you want to use. The PV then has to be different than those two. Im 100% sure about this and even decided to do a proof by doing it both ways…..and my way had the higher interest rate then if you had the PV and payments same sign which would make sense because you were pulling 55k a year, not adding.
jimmylegs Wrote:
——————————————————-
> Mo34:
>
> I may be wrong, but I thought:
>
> PV should be negative: you are funding the
> portfolio (an outflow)
> Pmt is negative: what flows out of the portfolio
> FV is positive: what you have left or “get back”
Also thats not the right way to look at the funding. Funding is an INFLOW to the portfolio…….and OUTFLOW to the investors bank account.
still confused on the inflation, why the heck didnt you have to add it on the second part? they wanted to protect purchasing power the only reason to not include it was if the 15 mm was in future dollars, the case did not state this but of course cfai was probably assuming.
I adjusted the second answer for inflation. I had 8.48% and then multiplied times 4% for inflation. They said to protect for inflation. I got like 1.0848*1.04=12.8%, something like that. I know thats a high return requirement. But without the inflation adjustment, the purchasing power is not maintained even if you want a target amount of $15M. At least thats what I think.
they never adjust for inflation when they use the TVM calculation. They either specifically mention “in today’s dollars” or they just omit to mention. In any case they never added inflation as you assume the 15 million he is targeting in 5 years are in today’s dollars
The second part to this question was similar to the first question in 2007. In Q1 2007 we were given a target FV of $3M. The claculations were:
N=35
I/yr=????? solve for this and you got 4.84%
PV=-4M
PMT=205K
FV=3M
Then in the answer per the cfai description you took the return and multiplied it times inflation to protect the priniciple. Which was 1.0484*1.025=7.46%. How are these different two different? Both have present values, cash requirements each year, and a targeted FV.
5major Wrote:
——————————————————-
> I adjusted the second answer for inflation. I had
> 8.48% and then multiplied times 4% for inflation.
> They said to protect for inflation. I got like
> 1.0848*1.04=12.8%, something like that. I know
> thats a high return requirement. But without the
> inflation adjustment, the purchasing power is not
> maintained even if you want a target amount of
> $15M. At least thats what I think.
Someone mentioned a footnote that said the future amount they needed was already inflation-adjusted. I don’t recall seeing it but I’m sure it was there.
hezagenius Wrote:
——————————————————-
> 5major Wrote:
> ————————————————–
> —–
> > I adjusted the second answer for inflation. I
> had
> > 8.48% and then multiplied times 4% for
> inflation.
> > They said to protect for inflation. I got like
> > 1.0848*1.04=12.8%, something like that. I know
> > thats a high return requirement. But without
> the
> > inflation adjustment, the purchasing power is
> not
> > maintained even if you want a target amount of
> > $15M. At least thats what I think.
>
>
> Someone mentioned a footnote that said the future
> amount they needed was already inflation-adjusted.
> I don’t recall seeing it but I’m sure it was
> there.
There is no way there was a footnote stating this, can anyone confirm this? If so that unbelievable, mention it in the case they have all this other cr@p in there.
I also think in the first question that you had to factor taxes into the return calculation. I know that salary and expenses offeset eachother, and both grow by inflation together into the future which was fine. But, the after tax return for the first calc which was something like 55K/955K (cant remember eactly) needed to factor in both inflation and the 20% tax rate. The portfolio will needs to pay taxes on the $55k distribution every year. The portfolio wont generate tax free distributions. I think the first part needed to be adjusted for the 20% long term capital gains tax rate along with the inflation adjustment to protect the principle…..This site is nerve racking!…..
5major Wrote:
——————————————————-
> I also think in the first question that you had to
> factor taxes into the return calculation. I know
> that salary and expenses offeset eachother, and
> both grow by inflation together into the future
> which was fine. But, the after tax return for the
> first calc which was something like 55K/955K (cant
> remember eactly) needed to factor in both
> inflation and the 20% tax rate. The portfolio will
> needs to pay taxes on the $55k distribution every
> year. The portfolio wont generate tax free
> distributions. I think the first part needed to be
> adjusted for the 20% long term capital gains tax
> rate along with the inflation adjustment to
> protect the principle…..This site is nerve
> racking!…..
it was asking for after tax return, not before tax.
You are correct. I am mistaken. It was an after tax return calc in the first part. Looks like I screwed that one up. Hopefully I am not totally shot down for adjusting for taxes.
- in the first rtn calculation no adj for inflation was needed, as mortgage is fixed (i made this mistake as well adding the inflation premium)
- no tax adjustments had to be made as portfolio return should be after tax in this case to achieve the mortgage pmts….
eastwest Wrote:
——————————————————-
> - in the first rtn calculation no adj for
> inflation was needed, as mortgage is fixed (i made
> this mistake as well adding the inflation
> premium)
> - no tax adjustments had to be made as portfolio
> return should be after tax in this case to achieve
> the mortgage pmts….
inflation was needed in the first question because they wanted the portfolio to grow at inflation.
The sign of the CF has to be the same as the sign of the FV and opposite to the PV. That’s about it.
Mo34:
I may be wrong, but I thought:
PV should be negative: you are funding the portfolio (an outflow)
Pmt is negative: what flows out of the portfolio
FV is positive: what you have left or “get back”
Whatever flows in is one sign, whatever flows out is another sign.
That inflation adjustment is what killed me. I read it and thought “is this saying only protect the 500k from inflation? that makes no sense, I must be reading it wrong” apparently I wasn’t
-5 right there
rohufish Wrote:
——————————————————-
> 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.
jimmylegs Wrote:
——————————————————-
> Mo34:
>
> I may be wrong, but I thought:
>
> PV should be negative: you are funding the
> portfolio (an outflow)
> Pmt is negative: what flows out of the portfolio
> FV is positive: what you have left or “get back”
think of it like making an IRR calculation. you put your original investment in one sign and all the cash flows you will be getting in another sign.
For the second return recalculation, it is 100% definitely 8.48%
I checked in my calculator… it is easy since it is only 5 years to check…
It was just 10,200,000 times (1+.0848)= new amount-55,000.
Then repeat until you have done it five times and you get 15,000,000.
Shoot. lost some points here based on this nuance. This goes back to freshman year undergrad and I missed it. Hopefully they don’t take off full points because of this.
55k was the pymt needed after tax, did anyone adjust that for pretax to get the return req part? I think my answer was still around 9.45, but i had a pymt of 68750 or something…
They asked for After-tax returns. So no adjustments needed.
hala_madrid Wrote:
——————————————————-
> yep, i went with average… there were some small
> nasty details… although I guess not important
> enough… i think i got this wrong
Average risk– No extra discretinary income and portfolio is paying the mortgage…..at the same time a second 750 coming in 10 years helps out.
Did the question mention whether the Trust was Revocable or Irrevocable? If it was revocable, then the future payment cannot be relied upon.
^^ no it didnt but the next 750 would almost double their current wealth of 995 or something. i had above average
HOWEVER, people think think think>>>>>>>>
do you remember mental accounting?
we all did mental accounting. again watch as i never touch a question’s specifics:
lets say i make 100K and my expenses are 100K. i have a mortgage that is 3K a month ` 36K annual.
by mental accounting i start thing, oh i got my expenses covered. i only need to take care of mortgage from my portfolio. i am looking at mortgage different from my living expenses.
hence mental accounting.
There are only two tragedies in life: one is not getting what one wants, and the other is getting it - Oscar Wilde
jimmylegs Wrote:
——————————————————-
> Mo34:
>
> I may be wrong, but I thought:
>
> PV should be negative: you are funding the
> portfolio (an outflow)
> Pmt is negative: what flows out of the portfolio
> FV is positive: what you have left or “get back”
Nope….Payment has to be the same as the FV, whatever sign you want to use. The PV then has to be different than those two. Im 100% sure about this and even decided to do a proof by doing it both ways…..and my way had the higher interest rate then if you had the PV and payments same sign which would make sense because you were pulling 55k a year, not adding.
jimmylegs Wrote:
——————————————————-
> Mo34:
>
> I may be wrong, but I thought:
>
> PV should be negative: you are funding the
> portfolio (an outflow)
> Pmt is negative: what flows out of the portfolio
> FV is positive: what you have left or “get back”
Also thats not the right way to look at the funding. Funding is an INFLOW to the portfolio…….and OUTFLOW to the investors bank account.
Yes I realize my error; was just in denial for awhile. Missed easy points.
still confused on the inflation, why the heck didnt you have to add it on the second part? they wanted to protect purchasing power the only reason to not include it was if the 15 mm was in future dollars, the case did not state this but of course cfai was probably assuming.
In the second part, they needed 15M at retirement and fix payment. so no need to add inflation….
I adjusted the second answer for inflation. I had 8.48% and then multiplied times 4% for inflation. They said to protect for inflation. I got like 1.0848*1.04=12.8%, something like that. I know thats a high return requirement. But without the inflation adjustment, the purchasing power is not maintained even if you want a target amount of $15M. At least thats what I think.
they never adjust for inflation when they use the TVM calculation. They either specifically mention “in today’s dollars” or they just omit to mention. In any case they never added inflation as you assume the 15 million he is targeting in 5 years are in today’s dollars
The second part to this question was similar to the first question in 2007. In Q1 2007 we were given a target FV of $3M. The claculations were:
N=35
I/yr=????? solve for this and you got 4.84%
PV=-4M
PMT=205K
FV=3M
Then in the answer per the cfai description you took the return and multiplied it times inflation to protect the priniciple. Which was 1.0484*1.025=7.46%. How are these different two different? Both have present values, cash requirements each year, and a targeted FV.
5major Wrote:
——————————————————-
> I adjusted the second answer for inflation. I had
> 8.48% and then multiplied times 4% for inflation.
> They said to protect for inflation. I got like
> 1.0848*1.04=12.8%, something like that. I know
> thats a high return requirement. But without the
> inflation adjustment, the purchasing power is not
> maintained even if you want a target amount of
> $15M. At least thats what I think.
Someone mentioned a footnote that said the future amount they needed was already inflation-adjusted. I don’t recall seeing it but I’m sure it was there.
n = 5 I think, not 35…..
hezagenius Wrote:
——————————————————-
> 5major Wrote:
> ————————————————–
> —–
> > I adjusted the second answer for inflation. I
> had
> > 8.48% and then multiplied times 4% for
> inflation.
> > They said to protect for inflation. I got like
> > 1.0848*1.04=12.8%, something like that. I know
> > thats a high return requirement. But without
> the
> > inflation adjustment, the purchasing power is
> not
> > maintained even if you want a target amount of
> > $15M. At least thats what I think.
>
>
> Someone mentioned a footnote that said the future
> amount they needed was already inflation-adjusted.
> I don’t recall seeing it but I’m sure it was
> there.
There is no way there was a footnote stating this, can anyone confirm this? If so that unbelievable, mention it in the case they have all this other cr@p in there.
I also think in the first question that you had to factor taxes into the return calculation. I know that salary and expenses offeset eachother, and both grow by inflation together into the future which was fine. But, the after tax return for the first calc which was something like 55K/955K (cant remember eactly) needed to factor in both inflation and the 20% tax rate. The portfolio will needs to pay taxes on the $55k distribution every year. The portfolio wont generate tax free distributions. I think the first part needed to be adjusted for the 20% long term capital gains tax rate along with the inflation adjustment to protect the principle…..This site is nerve racking!…..
Ponponpq I was referencing an exam problem from last year. Not the test on Saturday. Dont want to confuse anyone.
5major Wrote:
——————————————————-
> I also think in the first question that you had to
> factor taxes into the return calculation. I know
> that salary and expenses offeset eachother, and
> both grow by inflation together into the future
> which was fine. But, the after tax return for the
> first calc which was something like 55K/955K (cant
> remember eactly) needed to factor in both
> inflation and the 20% tax rate. The portfolio will
> needs to pay taxes on the $55k distribution every
> year. The portfolio wont generate tax free
> distributions. I think the first part needed to be
> adjusted for the 20% long term capital gains tax
> rate along with the inflation adjustment to
> protect the principle…..This site is nerve
> racking!…..
it was asking for after tax return, not before tax.
You are correct. I am mistaken. It was an after tax return calc in the first part. Looks like I screwed that one up. Hopefully I am not totally shot down for adjusting for taxes.
- in the first rtn calculation no adj for inflation was needed, as mortgage is fixed (i made this mistake as well adding the inflation premium)
- no tax adjustments had to be made as portfolio return should be after tax in this case to achieve the mortgage pmts….
eastwest Wrote:
——————————————————-
> - in the first rtn calculation no adj for
> inflation was needed, as mortgage is fixed (i made
> this mistake as well adding the inflation
> premium)
> - no tax adjustments had to be made as portfolio
> return should be after tax in this case to achieve
> the mortgage pmts….
inflation was needed in the first question because they wanted the portfolio to grow at inflation.
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