IPS - calculating return on portfolio

CFA Level II Portfolio Management
#1

Hi,

On CFAI page 522

Need return of 2m in 18 years and current assets are 1.2m

The projected incorporates excess inflation.

so the couple needs to earn. (2/1.2)^(1/18) -1 = 2.88% return

and then the an additional 0.025m needs to be liquidated a the end of each year.

why is the return 4.55% then? Can someone explain please? Thanks.

#2

I did not check the book but just did with my calculator:

PV = -1.2 (what they have now)

PMT = 0.025 (what they need each year)

FV = 2 (what they need at the end)

N = 18 (number of years)

And solving for I/Y I got 4.55%.

#3

Thanks a lot!! Makes sense! Brilliant!