2013 AM Q6 Part B

[dwheats]

Why do they calculate the multiplicative return like this:
required spending = 6%
inflation = 3.5%
management fee = 0.4%
Required nominal return = (1 + 0.06 + 0.035) * (1 + 0.004) - 1 = 9.94%
They add the inflation?
Why not do this:
Required nominal return = (1 + 0.06) * (1+ 0.035) * (1 + 0.004) - 1 = 10.15%

 

[cpk123]

please check the answer key
Therefore:
Nominal return requirement = (1 + 0.06) x (1 + 0.004) x (1 + 0.035) – 1 = 10.15% (multiplicative method)
OR
Nominal return requirement = 6.0% + 0.4% + 3.5% = 9.9% (additive method)
OR
Nominal return requirement = (1 + 0.06 + 0.035) x 1.004 – 1 = 9.94% (calculation method, reflecting exact timing of cash flows)
All 3 methods are accepted …

 

[dwheats]

^ true. overlooked my answer. thanks
ashamed by 1,000th post was so stupid

 

[cpk123]

no issues you have your exam in less than 1 week (I have all the time in my world now).