FI 4240 Final Exam(100% Verified)
Understand the distinction between real and nominal income for a retiree correct answers
Simply: Nominal is dollar amount written on paycheck (not adjusted for inflation.
Real income is adjusted for inflation.
Fisher equation:
Nominal rate= Real rate + Expected inflation(Approx.)
(1+Nominal Rate)= (1+Real Rate) * (1+ inflation rate) (Accurate)
Convert nominal dollars (received in the future) to real dollars (also called "t=0 dollars"). correct
answers Nominal at T=(nominal $)/(1+inflation rate)^t
Calculate the spending and reinvesting levels from a long-term bond (or any) investment to keep
real spending at a constant amount (Scenario Two). Understand the assumptions used and the
logic of the approach. correct answers 1. Nominal Income -
(Total Baln-1)(YTM)
2. Nominal $ to Spend -
(Nominal Income- Reinvest)
3. Spending in Real $ -
Nominal Spend/(1+inf)^t
4. $ to reinvest/disinvest -
(Tot. Baln-1)(inf)
5. Balance in $ -
(Tot. Baln-1)+reinvest
Calculate spending and disinvesting levels from a long-term bond (or any) investment to keep
constant nominal spending levels and such that you just exhaust your wealth at the end of the
defined period (Scenario Three). Understand the assumptions used and the logic of the approach.
correct answers PV - inital investment t=0
FV - 0
IY - YTM
N - Years life remaining
PMT - (Solve)
^ gives you Nominal $ Spend ^
1. Nominal Income -
(Total Baln-1)(YTM)
2. Nominal $ to Spend -
(Nominal Income- Reinvest)
3. Spending in Real $ -
Nominal Spend/(1+inf)^t
4. $ to reinvest/disinvest -
(Tot. Baln-1)(inf)
5. Balance in $ -
, (Tot. Baln-1)+reinvest
Calculate spending and disinvesting levels from a long-term bond (or any) investment to keep
constant REAL spending levels and such that you just exhaust your wealth at the end of the
defined period (Scenario Three). Understand the assumptions used and the logic of the approach.
correct answers PV - inital investment t=0
FV - 0
IY - (1+Nom/1+inf)-1=real rate
N - Years life remaining
PMT - (Solve)
^ gives you REAL $ Spend ^
1. Nominal Income -
(Total Baln-1)(YTM)
2. Nominal $ to Spend -
(Nominal Income- Reinvest)
3. Spending in Real $ -
Nominal Spend/(1+inf)^t
4. $ to reinvest/disinvest -
(Tot. Baln-1)(inf)
5. Balance in $ -
(Tot. Baln-1)+reinvest
Identify and be able to critique the assumptions we used in modeling the retirement income
earned from the bond investment. correct answers -we dont know life expectancy,
-we dont know actual inflation
-we assume inf is constant when it isn't
- we dont know spending levels
- we didnt consider other complications (like spouse)
Answer this question: Are long-term U.S. Treasury bonds a low-risk investment for a retiree?
correct answers Answer: If you define low risk as receiving the nominal payment you think you
are going to receive? Then, yes.
If you define low risk as receiving the real payment you think you are going to receive? Then,
no.
Explain the concept of Portability with a 401(k) correct answers Portability is an employee's
ability or right to retain certain benefits when switching employers.
How you can move your money when you leave an employer:
- Roll the Money into an IRA
- Roll money into new employers 401(k)
- Withdraw money in a lump sum
Understand the distinction between real and nominal income for a retiree correct answers
Simply: Nominal is dollar amount written on paycheck (not adjusted for inflation.
Real income is adjusted for inflation.
Fisher equation:
Nominal rate= Real rate + Expected inflation(Approx.)
(1+Nominal Rate)= (1+Real Rate) * (1+ inflation rate) (Accurate)
Convert nominal dollars (received in the future) to real dollars (also called "t=0 dollars"). correct
answers Nominal at T=(nominal $)/(1+inflation rate)^t
Calculate the spending and reinvesting levels from a long-term bond (or any) investment to keep
real spending at a constant amount (Scenario Two). Understand the assumptions used and the
logic of the approach. correct answers 1. Nominal Income -
(Total Baln-1)(YTM)
2. Nominal $ to Spend -
(Nominal Income- Reinvest)
3. Spending in Real $ -
Nominal Spend/(1+inf)^t
4. $ to reinvest/disinvest -
(Tot. Baln-1)(inf)
5. Balance in $ -
(Tot. Baln-1)+reinvest
Calculate spending and disinvesting levels from a long-term bond (or any) investment to keep
constant nominal spending levels and such that you just exhaust your wealth at the end of the
defined period (Scenario Three). Understand the assumptions used and the logic of the approach.
correct answers PV - inital investment t=0
FV - 0
IY - YTM
N - Years life remaining
PMT - (Solve)
^ gives you Nominal $ Spend ^
1. Nominal Income -
(Total Baln-1)(YTM)
2. Nominal $ to Spend -
(Nominal Income- Reinvest)
3. Spending in Real $ -
Nominal Spend/(1+inf)^t
4. $ to reinvest/disinvest -
(Tot. Baln-1)(inf)
5. Balance in $ -
, (Tot. Baln-1)+reinvest
Calculate spending and disinvesting levels from a long-term bond (or any) investment to keep
constant REAL spending levels and such that you just exhaust your wealth at the end of the
defined period (Scenario Three). Understand the assumptions used and the logic of the approach.
correct answers PV - inital investment t=0
FV - 0
IY - (1+Nom/1+inf)-1=real rate
N - Years life remaining
PMT - (Solve)
^ gives you REAL $ Spend ^
1. Nominal Income -
(Total Baln-1)(YTM)
2. Nominal $ to Spend -
(Nominal Income- Reinvest)
3. Spending in Real $ -
Nominal Spend/(1+inf)^t
4. $ to reinvest/disinvest -
(Tot. Baln-1)(inf)
5. Balance in $ -
(Tot. Baln-1)+reinvest
Identify and be able to critique the assumptions we used in modeling the retirement income
earned from the bond investment. correct answers -we dont know life expectancy,
-we dont know actual inflation
-we assume inf is constant when it isn't
- we dont know spending levels
- we didnt consider other complications (like spouse)
Answer this question: Are long-term U.S. Treasury bonds a low-risk investment for a retiree?
correct answers Answer: If you define low risk as receiving the nominal payment you think you
are going to receive? Then, yes.
If you define low risk as receiving the real payment you think you are going to receive? Then,
no.
Explain the concept of Portability with a 401(k) correct answers Portability is an employee's
ability or right to retain certain benefits when switching employers.
How you can move your money when you leave an employer:
- Roll the Money into an IRA
- Roll money into new employers 401(k)
- Withdraw money in a lump sum
