Q7 2015 CFA AM Mock

CFA Level III
#1

Could anyone advise why in Q7 part b we are taking -5000000 as FV value? Please advise. I am confused regarding whether to take positve/negative value in ba 2 plus calculator?

#2

What does the vignette say?

#3

It is about Betty Friesman and she want to gift some amount to her son ryan. He has net saving of -390000 and he will need investment portfolio valued at 5000000 to maintain his lifestyle in retirement when he retire in 4 years?

#4

So . . . there’s your $5 million.

#5

Yes, I understand that part. I am confused why in the ba2 plus calculator we are taking -5000000 as future value instead of 5000000?

#6

Because the TVM buttons are cash flow buttons. He’ll open an account today, then close it in 4 years. Looking at it from the account’s point of view, the closure is a cash outflow.

#7

Hi Magician , Thanks for the response. If we look it from betty POV then it should be a negative as it is an outflow while from Ryan POV it should be positive as he is receiving payment? Question is calculate amount in $ that must be transferred from betty assets to ryan to allow him to acheive his goals? So question is from betty POV?

#8

It doesn’t matter whose point of view you take; the answer’s the same either way.

You can calculate it from Betty’s/Ryan’s point of view:

FV = \$5,000,000\\ PMT = \$360,000\\ n = 4\\ i = 6\%\\ Solve\ for\ PV = \$-5,207,906

or from the account’s point of view:

FV = \$-5,000,000\\ PMT = \$-360,000\\ n = 4\\ i = 6\%\\ Solve\ for\ PV = \$5,207,906

What matters is that the sign on the $5,000,000 and on the $360,000 have to be the same; they’re both coming out of the account and going to Ryan.

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#9

Thanks magician. Now I understood.