Band of Investment Method

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KSTHANE

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On the CFA mock, their explanation is wrong for their band of investment method question which is number 28 in the morning session. They calculate the sinking fund factor but don’t add it back to the interest rate. The numbers in the sinking fund factor are similar to the sinking fund factor + the interest rate, but it’s a coincidence. I think that’s how they screwed it up.
I can’t find an errata for the mock exam on the website but that threw me off for awhile since I had forgotten how to do that.
 
are you saying they should add that 10.07% to what? 0.75% monthly rate?
Also, I thought we did FV=1 rather than PV=1? Thanks.
 
would love someone to explain how to calc the debt part as it totally confused me..
 
They didn’t actually calculate 10.07% in the problem. They calculated the sinking fund factor, which was .0107. You have to add .0107 to .09 in order to get .1007 which is the debt portion of the BOI.
The sinking fund factor is pretty simple to calculate, for example in that problem you would use your calculator as follows:
N = 300, I = 9/12 PV= 0 PMT = calc FV = 1
Whatever the PMT comes to you multiply by 12.
Then you add it to .09 to get the debt portion of the BOI method.
 
not sure what I’m missing but if you do N=300, I=9/12, PV=$1 like they say, CPT PMT=0.008392, multiply that by 12 months, you get 10.07%.
If you do PV=0 and then FV=1 like you say, THEN you get 0.0107, then add 0.09 to get 10.07% the answer. So does this difference in setting FV or PV to 1 create the difference?
 
Hmm, you’re right. Both Schweser and the CFA text (I have the 2010 text at home, not sure how they show it in the 2011 text which I have at work) shows to do it by adding the sinking fund factor back to the original interest rate and to use that FV amount to do the calculation. I guess this is a shortcut that they decided to bust out on the mock exam.
Good catch, the explanation isn’t wrong. When I was reading it last night I guess I just never actually did what they said to do with the PV and just kept using FV.
 
haha yeah they just skip a step or two as usual and pretend like everythings cool. So either way will work, that’s good I guess…
 
Stalla does it in a easier-to-understand way:
Find monthly payment if not given. Then multiply by 12 and you get annual payment of debt. devided it by loan outstanding at beg of period and you get the adjusted rate.
this just fucking make sense!!!
 
thanks…but how would you do that for this one? I’m not getting it
 
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