# 1st Q in AM

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55000 net of tax, so 55/0,8 - gross of tax and 55/0,8*1,04 - nominal. correct?

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Not sure, I thought they asked for the after tax return??? If you adjust for taxes you’d get the pre-tax return.

was it 6.4% pre tax nominal return?

close. it was between 5-6%..don’t remember. it’s sum of 2 exp. adj for inf divided by 2.2m pf value. then grossed up for 20pc tax.

Cannot 100% remember.

If someone had assets of 500,000, then received 750,000 but decided to put 30% down on a 850,000 home (255,000) they would have 995,000 left.

If they needed 55,000 per year - return would be 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 got a required return of 9.75% for the 1st question in the AM and then 8.48% for the 2nd part after the situation had changed.

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.

I like PJ’s number.

I think I Fvked up the 2nd part by adding inflation to it - but cannot remember for sure what I did :(

after situation had changed the req annual rate of return req was 7.7% (approx)

volkovv Wrote:
——————————————————-
> 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.

Beautiful…coming from Volkovv I love it!!! :)

PJStyles Wrote:
——————————————————-
> volkovv Wrote:
> ————————————————–
> —–
> > 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.
>
>
> Beautiful…coming from Volkovv I love it!!! :)

sounds like my numbers too

I wrote 5.52% + 4% inflation but changed the answer last minute and removed the inflation rate. The only cash flow they need is 55,000 of the annual mortgate payment and it’s a fixed payment. Any thought?

inflation definitelly had to be included for first return calculation, they expilictly said in the case that the family wanted to protect the value of their portfolio on inflation-adjusted basis.

Did anyone adjust for the interest earned and taxes paid the 500k in cash? The relevant tax rates were provided.

I didn’t see any rates that they were earning……please tell me there weren’t

Factors that reduce ability to take on risk:

- mortgage payments?
- possible university tuition?

I really struggled to find anything.

i wrote:
mortgage and “salary just cover their expenses”

Are you sure they explictly said protect the “portfolio value” from the inflation? I thought they said protect from living expenses grow at the inflation rate which will be covered by their salary anyway. I remember they said keep the minimum value of 500,000 investable assets. If they protect the portfolio value (or investable assets) from the inflation, but not the fixed mortgage payment, it won’t be same as adding 4% or x 1.04 to the first year’s return requirement. You may have to set the FV = 995,000 * 1.04^10 (for the first time horizon before the second distribution), PMT = 550,000 and calcualte i which should be lower than 9.52%. I don’t know… Maybe I’m overthinking on this…

ya dude everyone here is wrong it was 6.6 % for first return
and for annual return requirement it was 7.7 %

so dont freak out

the question was actually very tricky. wealthy grandparents. parents who cannot cover their expenses so need 9%+ return to cover their required mortgage expenses out of their portfolio.

nobody says anything about average Vs above average?

I said above average:

Long time horizon
Don’t need portfolio return for living expenses.

But that’s up in the air off-course.

yep, i went with average… there were some small nasty details… although I guess not important enough… i think i got this wrong

ChiTownShane Wrote:
——————————————————-
> Did anyone adjust for the interest earned and
> taxes paid the 500k in cash? The relevant tax
> rates were provided.

i adjusted for interest earned but forgot to adjust for taxes as i was trying to change my answer in last 10 minutes.
Which rate did you use for rate on ST rate? I used inflation as it was the only number given, and usually real return on ST instruments is very small or negative.

said “below.”

should defenitely cover mortgage and this is the only source for the payment.

no reason to inflation adjust the return since the only distribution is fixed (the principal will still be protected.)

ie - if I have \$1,000,000 and need 50,000 in yr1 and earn 50,000 then my principal is in tact. If my expenses and portfolio for yr2 look exactly the same as year one, then there is no need to adjust for inflation.

IMHO. But we’ll see when they release answers this winter.

p.s. - I don’t really take what anybody on here (including myself) says was “right” for any answer. Unless you guys are grading my exam from your memory, I’d rather just wait for CFAI’s results … so why am I checking this board … ok, I’m busted.

L2 Candidate Wrote:
——————————————————-
> Cannot 100% remember.
>
> 750,000 but decided to put 30% down on a 850,000
> home (255,000) they would have 995,000 left.
>
> If they needed 55,000 per year - return would be
> 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 fixed.

The inflation rate is factored in to protect the principal. Even if the 55000 is fixed, I think it should be adjusted for inflation.

jwsmith6 Wrote:
——————————————————-
> no reason to inflation adjust the return since the
> only distribution is fixed (the principal will
> still be protected.)
>
> ie - if I have \$1,000,000 and need 50,000 in yr1
> and earn 50,000 then my principal is in tact. If
> my expenses and portfolio for yr2 look exactly the
> same as year one, then there is no need to adjust
> for inflation.
>
> IMHO. But we’ll see when they release answers this
> winter.
>
> p.s. - I don’t really take what anybody on here
> (including myself) says was “right” for any
> your memory, I’d rather just wait for CFAI’s
> results … so why am I checking this board . .
> . ok, I’m busted.

right in the sentence sayign they wanted to pay their mortage they said they wanted their payment to increase by inflation. i changed it from no inflation to inflation based on that.

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?

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