Sorry if this has been asked before but I couldn’t find it in the search function. On the Mock 2010 question B.ii The pretax nominal rate of return had no adjustment for inflation. On the Mock 2009 question A.ii The pretax nominal rate of return was multiplied by the expected inflation of 4%. Is there a reason for the differing treatment?
and what inflation rate would you be using in the 2010 questions?
^ Yes I didn’t think it was listed. But doesn’t it need to be to calculate the nominal rate of return.
Bump. Come on AF, I try to contribute to some of your questions. Help a Pinkman out.
I don’t remember 2009 but for 2010, it was a TVM questions. Objective was to obtain 2mm in x amount of years. So the return requirement needs to satisfy this.
i would humbly suggest that in situations like this you should just be thankful they didn’t include the data, in which case they’re saving you from another potential way of messing up the calculation. how is this question helping you right now? if they don’t give you an inflation rate, you can’t use one. if they don’t give you a tax rate, you can’t use one of those. you should probably spend your time figuring out how to use the data they DO give you.
Pinkman, if you find ANY information in the Q1 of 2010 am exam about inflation, then let me know (i looked several times and now again) If no inflation figure is mentioned, I must treat nominal=real as far as I am concerned, even in the guideline answer, inflation is not even mentioned
I think since future value to be computed is given we just need to calculate return using a calculator and this return will already incorporate nominal return. I was confused in 2009 Q1 as to why they took tax effect first and then added inflation. Since tax is always on nominal value so shudn’t we add inflation first and then take tax effect? In examples in CFA book volume 2(strategic asset allocation) where a real,after tax return has been given they first add inflation and then take tax effect. Can anyone help me out?
pinkman-- Lima needs fixed $12,000 return every year (to fund TDA), also her spending need from portfolio are zero. In other words she needs no inflation adjustment. You could say her personal inflation is 0. If it helps contrast it with a Educational foundation where education specific inflation is 8%…in that case the general inflation of 3% is meaningless. Bottom-line is the client has 3 specific needs: 1) Capital gain 2) Capital preservation 3) Income The total of these components is “nominal return required” But the rate for 1, 2, 3 are highly specific to the client. In Lima’s case her needs are: 1) Capital gain (grow to $3million) 2) Capital preservation (0%) 3) Income ($12,000)
Sorry I had material errors in post above-- hopefully following edits help clarify: ------------------------------------------- Lima *contributed* fixed $12,000 every year (no Income need in planned period), also her spending need from portfolio are zero. Which also means she needs no inflation adjustment. You could say her personal inflation is 0. If it helps contrast it with a Educational foundation where education specific inflation is 8%…in that case the general inflation of 3% is meaningless. Bottom-line is the client has 3 specific needs: 1) Capital gain 2) Capital preservation 3) Income The total of these components is “nominal return required” But the rate for 1, 2, 3 are highly specific to the client. In Lima’s case her needs are: 1) Capital gain (grow to $2 million-- you could say the inflation need is baked in here) 2) Capital preservation (0%) 3) Income (-$12,000-- negative as she is contributing it)
For the 2009 IPS exam, Does anyone know why they had excluded the income from the portfolio? The after tax return provided in the chart was 4%. So 4% x 1, 100,000 (market value of portfolio) would be 44k. Income would be 80k +44K = 124k minus the expenses (125k) would give us a required need of 1k. then, you can adjust it for pretax and inflation. In 2006, the soccer player example…they provided the after tax income on the equity portfolio and was treated as income on the calculation. not sure why they didnt do it on 2009? any suggestions?