ya but we werent given a number or something… unikorn wat was the nominal pre-tax return calculated by u?
yea i couldnt remember any of the self dealing and swap questions. why are there different set of questions? pach Wrote: ------------------------------------------------------- > Ozzy, you are right, in Asia we didnt have the > self-dealing question and also the swap one.
0 payout for the collar, i took my exam at taiwan
equity_research_nds, I think it was 8.13% University edu support - 16,050 (15000 * 1.07) Parent support - 36,972 (36,000 * 1.027) Total required amount - 53,022 Portfolio - 2,200,000 After tax real return = 53,022/2,200,000 = 2.41% Blended Inflation rate = 4% Blended tax rate = 20% Pretax nominal return = ((1.0241)(1.04)-1)/(1-0.2) = 8.13%
howcome u used blended inflation rate? was it given?
Unikorn - couple of things : 1. only reqd return for the next year was asked so u don’t need to inf. the cost that has already been inflation adjusted. 2. as for the denominator, i am not sure if we should take the entire pf value of 2.2m. maybe we should exclude the tax deferred IRA portion. But i assumed 2.2 as well.
I did it this way… (1.0241*1.0270)-1= 6.47%
looks like there are several versions of the exam with different questions and topic…so there probably would be a different curve for each one!..so we shouldnt be too happy that our evening was easy!!!
Unikorn - the payoff was 0 for 1 question and for the other question that asked for the payoff on the 143rd day, we had to use the 90 day libor rate…right. The question was not clear if they wanted to us to cal. the payoff on 143rd day or use that to calculate the payoff for the next settlement. But the answers they provided matched only the 90day rate so i marked that one.
unikorn Wrote: ------------------------------------------------------- > equity_research_nds, I think it was 8.13% > > University edu support - 16,050 (15000 * 1.07) > Parent support - 36,972 (36,000 * 1.027) > Total required amount - 53,022 > > Portfolio - 2,200,000 > > After tax real return = 53,022/2,200,000 = 2.41% > Blended Inflation rate = 4% > Blended tax rate = 20% > > Pretax nominal return = ((1.0241)(1.04)-1)/(1-0.2) > = 8.13% I think i didn’t increase it by the inflation rate … i just took 2.41% / (1-0.2) = 3.1%… Something like that…coz the ques ask for 2008 nominal return to preserve capital. The expenses already have the inflation component. Why do we add the inflation? Correct me if i m wrong. I dont think i m right anyway.
those costs were for last year. for next year, you have to adjust it for inflation. that’s what I suppose. I think a couple of practice exam questions were like this, and those accounted for inflation adjustment.
Precursor…i did the same thing but i am unsure about the treatment of IRA a/c…may be we should exclude it from 2.2.
for next year u already inflated the 2007 expenses by its inflation rate…remember? if u think bout it, that is precisely the return u need to cover the tuition fee and parents support. (coz living exp already offset by salary). you add the inflation if the required return is a return figure for the whole time horizon. i wish i can plug it in the generic formula just like that if the ques is simple and straightforward but sadly it isn’t… Then again, what u think make sense doesnt matter coz CFA already hav its own answer Ozzy, what bout IRA acc?
Precursor - i agree with your numerator but not sure if we should include the ira a/c in the denominator. Though i did include…as an after thought doesn’t sound right
Precursor, expenses were adjusted for 2008 inflation, but in order to preserve capital, you need to add a return component for the future growth of expenses based on expected inflation. That’s why you add inflation to the real required return. You can’t call that 2.41 the nominal required return for 2008 since you’ll be accounting for inflation that has already occurred (in 2008) but for required return, you need to add future expected inflation. That is how I think. I may be wrong on that. But i think 3.1% is too low a return for pretax nominal one 
unikorn how did u get blended rate of inflation?
Precursor,Unikorn - you need to adjust for inflation only once for the reqd ret. for 08. just index last year’s exp. now the denominator is what i am notsure about…gosh…i hate these essay questions.
equity_research_nds Wrote: ------------------------------------------------------- > howcome u used blended inflation rate? > was it given? I borrowed it from the Endowment section of CFAI material - remember? (16,050*7% + 36,972*2.7%) / (16,050 + 36,972)
thts where we differ… whn u are protecting the principal u do it on the basis of the inflation faced by the investor not tht of his dependents
unikorn u may be right…coz according to last year answers and how it was framed, they added the inflation, even after adjusting for inflation in the expenses… then the required return will be sort of a fixed return you need for the rest of your time horizon rather than just 2008