Exam 2006, Q6. About Vrieland. “Like a DB pension plan, the liquidity needs of Vrieland fluctuate over time”. I feel a bit vague about this, because to me liquidity needs of a foundation can be quite stable. Comments? - sticky
perhaps to fund some projects additional liquidity may be required from time to time.
I have to think they are referring to short-term liquidity needs. Think about if foundation has a big(larger-than-usual) grant to make next year, or some hospital is upgrading their technology system, need more money than before. Various thing can happen that require a foundation to give more money than usual.
ws Wrote: ------------------------------------------------------- > I have to think they are referring to short-term > liquidity needs. Think about if foundation has a > big(larger-than-usual) grant to make next year, or > some hospital is upgrading their technology > system, need more money than before. Various > thing can happen that require a foundation to give > more money than usual. I understand and agree on that. However, there is NO such great spending mentioned in the question! That’s why I just thought “it should just make sure it’s spending 5% …” Now I have to remember this @_@ - sticky
Remember that 5% is the minimum, they can set the spending rate to whatever they choose it to be. Also, the above statement may just point out that the periodic spending isn’t a fixed dollar amount. I’ll need to take a look at the question…
Sticky, you are right. When I saw that question, I was thinking the same thing, however, I was thinking the question in general terms since there was lack of specific in the question. The reading thing is a bi*ch.
ws Wrote: ------------------------------------------------------- > Sticky, you are right. When I saw that question, > I was thinking the same thing, however, I was > thinking the question in general terms since there > was lack of specific in the question. The reading > thing is a bi*ch. sigh … there are more like this in the same question. eg. the last part on time horizon. The solution disagrees, using foundations in general, but not specific to Vrieland, which is a bit dodgy. - sticky
Perhaps this view is very simplistic, but here is what I think: + in foundations, ok, you have that 5% spending rate, which is constant in % terms, but not in usd terms + even assuming that spending in usd is constant forever, liquidity needs of foundation = anticipated needs (spending) + unanticipated needs - contributions (gifts, for example, although in foundations these are lower than in endowements). So if you are facing unanticipated needs and/or contributions, this will change overall liquidity needs
I stumbled on this one too, The thing is because you have 5% rule, your mind tends to go to this 5% stable liquidity needs, but like hala madrid says there are unticipated needs. here is the reply I got from CFA preparation guru, If you are confused by a defined benefit plan fluctuating, just think of it as not knowing exactly how many people will retire and what their exact salaries will be (for calculating the benefit). Foundations have a little more control because they must spend a certain percentage of their assets to maintain their status, but have some control over the upper limit of their spending (they just don’t make as many grants). But I still think this Q was weired. I mean if the foundation liquidity needs is so volatile it should have been mentioned some where …
And if it has been so volatile, I mean this liquidity needs from foundation, then it should have been mentioned in the constraint ‘unique needs there is this tendency that the liquidity needs becomes volatile —’ . (AND I THINK THAT APPLIES TO ALL THE OTHER INSTITUTIONS LIQUIDITY NEEDS, IF SOMETHING HAPPENS AND ALL OF THE SUDDEN YOU NEED MONEY (OUT FLOW ) THEN ABSOLUTELY WHETHER IT IS BANK OR INSURANCE OR ANYTHING WILL HAVE VOLATILE LIQUIDITY NEEDS’ SH#T