IPS - Liquidity Requirement for Foundations & Endowments

CFA Level III Portfolio Management
#1

Hi All,

For the liquidity requirement for foundations or endowments is it appropriate to list the spending target or requirement (if required to maintain a tax free status) in term of a calculation. I.E. if a 100MM foundation has a spending requirement of 5%, do I need to list 5MM for grants in the liquidity section of the IPS?

I did this on a Kaplan Mock and they just listed “no specific requirements”

Thanks

#2

Did the case scenario indicate anywhere that there was a donor contribution amounting to 5m as well?

If donor contribution >= spending requirement --> no liquidity requirement

#3

…and management fee is also part of liquidity requirement.

#4

^ yeah that too

#5

Hi Kevins and Flashback,

This was from the 2017 Kaplan V2 AM 3 Mock Q11.

The problem stated that the foundation at is at its inception and was funded with 1.5B so its sort of at is the start date, and contributions would be ongoing from profits when the Company could do so but nothing specific.

Hi Flashback - Yes agree I had my liquidity requirement as the 5% grant and the 2% management fee.

So again given this I thought for the coming year the liquidity requirement would be (1.5B)(.05) + (1.5B)(.02) = 0.105B, however the problem just stated no specific requirement.

What’s the right approach here is Kaplan just off on this this one?

#6

I am curious about Kaplan’s source of ideas for such question. Today I solved its Vol 1 PM 3 and in one question asked about removing callable bonds exposure through swaptions. Pretty exotic question. However I solved with 70 % but gave up from Kaplan’s Mocks revision.

There are such questions with Foundation/Endowment liquidity requirements in official Mocks and in given example should be (1+SR)(1+MFee)(Asset base) or just drop inflation component from return requirement and multiply with asset base in given year. I really have no idea for Kaplan’s guidance answer. Maybe there wasn’t any supported financing by Foundation in given period in case Kaplan’s answer would be correct (e.g. Foundation will not start with distributions for some period so it was the tricky question).

#7

Ya that is going to be my approach on the test as well (1+SR)(1+MFee)(Asset base) .

Thanks.

#8

Here is my notes on swaptions by the way this material

  • Swaptions are options to enter swaps:

  • Payer Swaption : Gives the buyer the right to receive floating payments for fixed payments.

  • Purchase a Payer Swaption to removed a putable feature from the perspective of a bond issuer.

  • Sell a Payer Swaption to add a putable feature from the perspective of a bond issuer.

  • Receiver Swaption : Gives the buyer the right to receive fixed payments for floating payments.

  • Purchase a Receiver Swaption to add a callable feature from the perspective of a bond issuer.

  • Sell a Receiver Swaption to remove a callable feature from the perspective of a bond issuer.

  • The exercise rate on the Swaptions should be the coupon rate on the bond minus the credit premium.