# CFAI 2012 Past Paper Q1A - Alonso IPS

Is the answer of 3.65% required return… Real or Nominal?

The actual CFAI question doesn’t ask for real or nominal, but I want to know in case they specify real or nominal in the exam. Please advise. Thanks.

Nominal because you need this amount to make FV into that amount. Your not worry about real value of anything, just the notional FV to be something.

But what we have to do if they give the inflation rate and they don’t disclose if we have to calculate a real or nominal return, any idea?

If you want real then: 1.0365/(1+infla). We do divison cause it’s multi-period. I don’t think they ever ask you to calculate a real rate in the exam. They either tell you to calculate a nominal rate (r + infla) or no need to maintain real value ®.

BTW: It would be pretty weird if they ask for real, since real returns don’t mean anything for this question. If you get the real return, but infla is lower than expected then you wouldn’t meet the ending FV.

I was pretty sure the rate was real ^^ but that makes sense that the rate is nominal with your explanation.

Thanks

Ok

so for all ips return calculations that require the TIBA 2+ calculator (N; PV; PMT; FV), the return computed will ALWAYS be Nominal, correct?

Yup that’s correct. However you still have to adjust for taxes R/(1-tax).

So 3.65% was post-tax nominal return?

I thought it was post-tax nominal , because the annual net cash outflows have been computed on a post-basis. Is this correct?

So you are saying 3.65 / (1-tax) = pre-tax nominal return?

Yes, I think there was a question like that 2003 or 2004.

I have a question regarding calculation of that amount:

With the BA II Plus I have to enter

N = 15

PV = -650.000

PMT = -25.000

FV = 1.600.000

I thought, FV and PMT get the same sign, and PV the opposite? Why is it different here?

Maddin - it’s because the cash flows here are going into the portfolio, not being paid from. This is a change-up on the signing. To remember it better, I think of the present value being positive, FV being negative, cuz it will be coming out of the port, and the PMT sign being positive for inflows to the account (adding to savings) and negative if the portfolio is making distributions (outflow)

thanks, KeepOnTruckin!

PV and PMT need to have the same sign if there are inflows going to the portfolio

Sorry I have a question on this:

The PMT = -25,000 does not inlude the “USD 30,000 of support to local youth sporting leagues”

It says they are part of his normal expenses.

Does anyone know why this is?

I have PMT = 30,000 - 25,000 = 5,000.

Any help would be appreciated

I guess the 25,000 is savings from his after-tax income and the 30,000 has already been subtracted.

Please ignore this comment, I couldn’t delete it!

This would be rude on my part. Am keeping it in my heart

This is not really true. Whether it is nominal or real depends on the nature of the cashflows themselves. If the cashflows are REAL - the required return calculated is REAL.

I got this feeling too, did you figure out why?