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Archive for October, 2015

Questions for Advanced Financial Planning – CFP

Posted by Prashant Shah on October 26, 2015

Problem Type 1:

Current household expenses of a couple 50,000 Rs. p.m.
Current age of Earning member 35 years
Current age of dependent spouse 32 years
Retirement age of Earning member 58 years
Life expectancy of Earning member 75 years
Life Expectancy of dependent spouse 80 years
Accumulation from existing investments 12,000,000 Rs.


They would require regular monthly inflation-linked stream of income equivalent to their current household expenses till the life of Earning member and thereafter 60% of that income till the spouse survives. The corpus is supposed to be invested at 7% p.a. What additional monthly amount to be invested with immediate effect in an investment yielding 11% p.a. to attain the desired corpus? (given inflation throughout is 5.5% p.a.)


Problem Type 2:

Today’s date is 1st April, 2013:
Current age of First Child 4 years
Current age of Second Child 1 year


Education expenses are required for each child at their respective age of 18 (Rs. 4 lakh at current cost) and for four subsequent years (Rs. 3 lakh p.a. at current cost). Expenses escalate at 5.5% p.a. All withdrawals are made in the beginning of the financial year. What monthly amount is to be invested at 11% p.a. with immediate effect up to one year prior to the required expenses for the First Child to achive this goal?


Problem Type 3:


A personal loan of Rs. 3 lakh is availed on credit card at 14% p.a. interest for tenure of 2 years. The credit card company charged processing fees of 1% of the loan amount. The interest on monthly reducing balance basis was charged in the credit card. What is the annual effective rate of interest paid in this transaction?


Problem Type 4:

Employee’s Gross salary per annum 1,000,000 Rs.
Estimated tax during the year 210,000 Rs.
Family’s monthly expenses 25,000 (including expenses incurred on household from official account)
Insurance premium (annual) 20,000 Rs.
Existing insurance cover 6,000,000 Rs.
Investment yield available on investing funds till retirement 10% P.a
Number of remaining years to retirement 28 Year


The anticipated increase in the Employee’s post-tax salary is 5% year on year. The employee consumes 25% of regular household expenses on self. What should be the amount of additional insurance required to replace the Employee’s income contribution to his family for his remaining years employment?


Problem Type 5:

Retirement age of the individual 60 years
Life expectancy of the individual 80 years

A deferred annuity pension plan offers optional one-third commutation on the date of vesting and life certain level annuity. The level annuity from uncommuted amount is Rs. 60,000 per month. The vesting sum of Rs. 1.5 crore is estimated on retirement of the individual.


If the individual opts to commute one-third of the expected vested amount and settles for life annuity from the remaining amount, at what rate of return the commuted amount shall be invested to yield a total income of Rs. 90,000 per month till he survives?


Problem Type 6:

Current age of Mr. A 28 years
Current age of the spouse of Mr. A 26 years
Retirement age of Mr. A 60 years
Current house hold expenses 25,000 Rs. Per month
Life expectancy of each of Mr. A and spouse 80 years
Post-retire expenses needed till Spouse’s survival as % of pre-retire. exp. 75%
Current investment available to be utilized towards retirement corpus 300,000 Rs.

Mr. A desires to have additional cushion of Rs. 1 crore as terminal value from the date of last survivor towards bequest. The retirement solution can be managed at yield of 12% p.a. in the initial 10 years, moderated to return 9% p.a. in the next 10 years. In the remaining years to retirement and continuing into retirement the funds could be managed to yield 7% p.a. Inflation is considerd 5.5% p.a. in the pre-retirement period and is expected to moderate at 4% p.a. in the post-retirement period. Estimate the viability of achieving this goal by investing Rs. 62,000 p.a. in the current available investment, starting immediately, which would be incremented by 5% in the beginning of every year. You analyze that _______.


Problem Type 7:

Situation: Bond valuation and return
Face value of the Bond 1,000 Rs.
Coupon Rate (coupon payable at the end of every year on 31-December) 9% p.a.
Date of maturity 31-Dec-17
Current market price (as on 1-Apr-2013) 1,078 Rs.

What would be the effective return if an investment is made in the bond today and held till maturity?


Problem Type 8:

Client’s current age 28 years
Age from which annual holidays to begin (continuing lifelong) 45 years
Funds required at current costs 50,000 Rs. P.a.
Cost escalation for holiday expenses 7% p.a.
Age of retirement 58 years
Life expectancy 75 years
Holiday expenses to be contained post-retirement (at current costs) to 30,000 Rs. P.a.


The client would start investing immediately a certain amount on a quarterly basis in investments yielding 11% p.a. up to the period of drawing expenses for holiday for the first time. Once the corpus is built-up, the funds for holidays for 5-year block periods would be switched to safe investments yielding 8% p.a. from which yearly expenses would be drawn. What is the amount of quarterly investment?


Problem Type 9:

Current household expenses of a couple 50,000 Rs. p.m.
Current age of the client 33 years
Current age of dependent spouse 30 years
Retirement age of the client 58 years
Life expectancy of the client 78 years
Life Expectancy of dependent spouse 80 years


The client wants to know the corpus required at his retirement which would be sufficient to sustain inflation-linked monthly expenses equivalent to their pre-retirement household expenses till the expected life of his spouse. The retirement corpus so accumulated shall be invested at 7% p.a. return while teh ruling inflation would be 5.5% p.a.. You estimate the corpus to be _________.


Problem Type 10:

Current household expenses of a couple 50,000 Rs. p.m.
Current age of the client 33 years
Current age of dependent spouse 30 years
Retirement age of the client 58 years
Life expectancy of the client 78 years
Life Expectany of dependent spouse 80 years
Estimated retirement corpus the couple is confident to accumulate 30,000,000 Rs.


The client wants to now the rate of return which would see the accumuleted corpus last till the spouse’s lifetime, if inflation-linked monthly expenses are drawn at 20% curtailmenet at the time of retirement. The inflation is considered at 5.5% p.a.


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