Contradiction in CFA Essay 2008 - Q1: real or nominal?

I don’t understand their logic: For part A.ii question 1, they add inflation to the mortgate which is at fixed amount for 30 year (then is not affected by inflation, right?) For part D.ii of the same question, they don’t add inflation to the 8.48%. Please explain it to me Thanks

Petprin I just did the 2008 paper this morning, and I totally agree with you. In Part A, they assumed the 55,000 mortgage payment was Real Post Tax. In Part D, they assumed the 55,000 mortgage payment was Nominal Post Tax. Is this because the known present value and the known terminal value of 15mm already factor in inflation? WHY? Please explain to me too!

you wouldn’t adjust your fixed mortgage payment in either case – it’s a set fixed cost. You adjust in part A to protect the principal…if you don’t add in inflation then each year you are ‘losing’ 4%. But in any case you’re not making an individual adj to the 55k. you should assume that when the PM says 15mm will be required, that the 8.48% has factored in preservation of real value.