# 2007 essay Q1

Wondering if any one has insight into the CFA answer to 2007 question 1 CFA answer PV = -4,000,000 in today’s dollars OK (1m + 2.4m + 0.8m - 0.2m) FV = 3,000,000 in today’s dollars OK (2m+1m) n = 35 (now, if you’re taking a payment today to meet expenses for coming year, and you’re assuming you will live for 35 years, you could make a strong argument for n=34 but OK, that may be splitting hairs and won’t affect final answer that much) ‘The Ingrams agree that their current annual pre-tax income need is C\$200,000’ PMT = 205,000 WTF? why would you use PV and FV in today’s dollars, but ‘next year’s dollars’ for PMT? I could understand if they said last year’s expenses were 200K and inflation is 2.5%, but they don’t say that. very irritating - I think CFA Institute is all wet on this one.

they said that they will use the first 200k immediately. thus the next pmt needs to be grossed up

heightscapital Wrote: ------------------------------------------------------- > Wondering if any one has insight into the CFA > answer to 2007 question 1 > > CFA answer > > PV = -4,000,000 in today’s dollars OK (1m + 2.4m + > 0.8m - 0.2m) > FV = 3,000,000 in today’s dollars OK (2m+1m) > > n = 35 (now, if you’re taking a payment today to > meet expenses for coming year, and you’re assuming > you will live for 35 years, you could make a > strong argument for n=34 but OK, that may be > splitting hairs and won’t affect final answer that > much) > > ‘The Ingrams agree that their current annual > pre-tax income need is C\$200,000’ > > PMT = 205,000 WTF? why would you use PV and FV in > today’s dollars, but ‘next year’s dollars’ for > PMT? > > I could understand if they said last year’s > expenses were 200K and inflation is 2.5%, but they > don’t say that. > > very irritating - I think CFA Institute is all wet > on this one. 205 000 refers to the disabled daugther i believe, it states it in the exam paper!

there is no disabled daughter - https://www.cfainstitute.org/cfaprog/resources/pdf/2007liiiexam.pdf If you’re going to live 35 years and your expenses are 200,000 in today’s dollars, you need 35 payments of 200,000 in today’s dollars. To say you’re going to take one payment of 200,000 and then 35 more of 205,000 is wrong. CFA Institute … FAIL. thanks for playing.

Agree with heightscapital-could not figure out where the extra \$5,000 came from - see also 2008 Q 6 problems-http://www.analystforum.com/phorums/read.php?13,975701

heightscapital, I agree with you. I asked the same question about 1 month ago and recently asked a finance professor. She also think it is no reason to use \$205,000 as PMT. Really want to know whether the \$205,000 is a typo.

it says that the planning horizon is 35 years. dont we always take next pmt and divide by beginning mkt value. pmt1/mv0. thus they tell us that the first 200k is going to be taken now. so we dont even include this in the asset base to start with. so now to start we need the next yrs pmt.

I think taking \$200,000 distribution now does not affects the amount of PMT. What is affected is only asset base.

The question tells you they are taking annual distributions from the portfolio with the first distribution to occur immediately. So I just assumed the next payment to be taken will be inflation adjusted up to 205,000 and used that as my PMT. You have to remember, the portfolio has to earn the return to cover next years needs.

exactly big babbu. you can even see the difference w/ this question and the 2008. in 2007 we need to account for inflation. because the pmt of 205000 will grow each year and the end value says in todays dollars. thus we need to gross it up. in 2008 it has constant payments and simple says they need x amout at the end of the year. thus no need to nflation adjust…

when you add the 2.5% at the end to convert the real return to nominal return, that adjusts all the future returns and cash flows for inflation. so if you start by grossing them up by 2.5%, in effect you adjusted for the first year’s inflation twice.

sorry, I don’t follow. If I pay 200,000 for something today and inflation is 2.5% I’m going to pay 205,000 for it next year.

• if you add inflation to get to 205,000 - then say you need a real return that will get you the 205,000 - then add inflation to that real return to give your nominal return - bingo, you added inflation twice Thanks cybernaut friends. I shall continue this discussion with my cat Markowitz. I can haz charter now?

KO…get your point there and have asked that question many times myself. All I can say is that’s the CFA way.

205k is what you need in 1 year’s time. You’re getting the the return rate based on the PV next year. Let’s say you take out the \$200k that you need and then decide to put the IPS stuff off for until next year. Your IPS in 1 year’s time will be based on \$205k, and then you have to apply the effects of inflation to it.