MONARCH INSTITUTE PTY LTD

DFP Module 2 - Appendix

Investments

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APPENDIX 1 WHAT DOES A RATINGS AGENCY DO?

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WHAT DOES A RATINGS AGENCY DO?

The information below is taken from the Moodys website at [Link]
Moody's credit analysis focuses on the fundamental factors and key business drivers
relevant to an issuer's long-term and short-term risk profile. The foundation of
Moody's methodology rests on two basic questions:
1. What is the risk to the debtholder of not receiving timely payment of principal and
interest on this specific debt security?
2. How does the level of risk compare with that of all other debt securities?
Moody's measures the ability of an issuer to generate cash in the future.
Determining the predictability of future cash generation is therefore the primary
focus of Moody's analysis. This determination is built on a careful analysis of the
individual issuer and of its strengths and weaknesses compared to those of its peers
worldwide. An examination of factors external to the issuer is also conducted,
including industry- or country-level trends that could impact the entity's ability to
meet its debt obligations. Of particular concern is the ability of management to
sustain cash generation in the face of adverse changes in the business environment.

MOODYS RATING PROCESS

In the course of the rating process, a Moody's analyst:

Gathers information sufficient to evaluate risk to investors who might own

or buy a given security,

Develops a conclusion in committee on the appropriate rating,

Monitors the security on an ongoing basis to determine whether the rating

should be changed, and

Informs the marketplace of Moody's actions.

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The rating process involves an active, ongoing dialogue between the issuer and
Moody's analysts. Once published, Moody's ratings are continuously monitored and
updated through dialogues and regular meetings, during which issuers are encouraged
to raise any concerns and present all materials that are pertinent to the analysis.
If an issuer is new to Moody's, the rating process begins with an introductory meeting
or teleconference call. The purpose of this initial discussion is to introduce Moody's
rating process and methodology, and to provide additional information regarding the
specific sorts of data that will be most useful in developing an understanding of the
organization. Our goal is to be as transparent as possible, and to ensure that issuers
understand Moody's rating methodology and process.

1) Meeting with Management

For a first-time rating, the initial rating meeting is generally held at a company's head
office location, and may last from a half day to a full day. Depending upon the nature
of the entity being rated, site visits may also be involved. The Moody's analyst will
discuss the meeting agenda with the issuer in advance of the meeting, to ensure the
issuer is aware of the type of information Moody's typically receives at such a meeting.
The discussion at the rating meeting will generally focus on the following subjects:

Background and history of the company/entity

Industry/sector trends

National political and regulatory environment

Management quality, experience, track record, and attitude toward risktaking

Management structure

Basic operating and competitive position

Corporate strategy and philosophy

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Debt structure, including structural subordination and priority of claim, and

Financial position and sources of liquidity, including

o

cash flow stability and predictability and ability to service debt

obligations,

operating margin, and

a balance sheet analysis in terms of debt profile and maturity.

Following the meeting, the Moody's analyst will continue with the analysis, and will
generally conduct further discussions with the issuer in order to obtain follow-up
information and clarification. Upon completion of the analysis, the Moody's analyst
will make a recommendation to a Moody's rating committee.

2) Moody's Rating Committee

A credit rating is forward-looking, and, by its very nature, subjective. The role of the
Moody's rating committee is to introduce as much objectivity into the process as
possible by bringing an understanding of the relevant risk factors and viewpoints to
each and every analysis. For all sectors, the rating process is guided by a common set
of basic analytical principles, including global consistency, an emphasis on qualitative
factors, and a focus on the long-term.
For a first-time rating, the lead analyst will convene a rating committee once all
analysis has been completed. It is his/her responsibility to include as many credit risk
professionals as necessary who have the appropriate knowledge and experience to
address all of the analytical perspectives relevant to the issuer. Factors considered in
determining the make-up of a rating committee may include the size of the issue, the
complexity of the credit, and the introduction of a new instrument. Also taken into
account are any issues that will have ramifications in the market or any relevant
sovereign issues. Moody's goal is to integrate the decision-making process on a global
basis, to facilitate worldwide ratings consistency.

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The role of the lead analyst at the rating committee meeting is to present the rating
recommendation and rationale, and to ensure that all relevant issues related to the
credit are presented and discussed. The discussions of Moody's rating committee are
strictly confidential, and only Moody's analysts may serve on them.

3) Rating Process Timeline

Moody's rating process, from the time of the preliminary discussion to the public
release of the rating, takes approximately 60-90 days. However, Moody's is sensitive to
issuers' needs and timing concerns, and will be as flexible and responsive as possible in
order to accommodate tighter financing schedules and other requirements.

4) Rating Dissemination and Publication

"Once the rating committee has made its decision, the issuer will be informed of the
rating and Moody's rationale. For a public rating, the new rating is distributed by press
release simultaneously to the major financial media worldwide. This press release will
also appear on Moody's global website [Link], as well as other relevant
regional and local Moody's websites."

5) Right of Refusal of the Moody's Rating in Asia Pacific

Moody's provides first-time rating applicants with the ability to determine whether
their ratings will be made public, subject to certain limitations, in the event of a debt
issuance by the applicant in any of the international capital markets at a later date. If
applicants choose not to have their rating published, then both Moody's and the
applicant will keep the rating confidential. Companies will not be permitted to disclose
their Moody's rating on a selective basis.

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6) Treatment of Confidential Information

Moody's recognizes that an issuer's trust in the confidential nature of the rating
relationship is an essential component of the rating process. Confidential information
will not be publicly disclosed, but, if relevant, will be used in the formulation of the
public rating opinion.

7) On-Going Relationship
Following assignment and publication of the rating, Moody's will meet with
management at least annually, or more frequently as events and industry
developments warrant. The Moody's analyst will maintain regular contact with the
issuer both electronically and via the telephone, and will be available at all times to
respond to an issuer's needs or questions. Following publication of the press release
announcing the initial assignment of the rating, Moody's will publish quarterly
summary opinions on the issuer. For certain very active issuers, an annual in-depth
analysis will also be published. Press releases will be issued to announce any
subsequent rating actions or outlook changes.

MOODYS RATING METHODOLGY

Moody's analyzes all relevant risk factors and viewpoints in arriving at a rating
opinion. Several analytical principles guide the process, including:
1) Focus on the long term - Moody's analytical focus is on fundamental factors that
will drive an issuer's long-term ability to meet debt payments, such as major economic
downturns, a radical change in management strategy, or major regulatory
developments. The ratings are not intended to ratchet up and down with business or
supply-demand cycles or to reflect short-term market movements.

2) Emphasis on stability and predictability of cash flow - One of Moody's main

analytical concentrations is on understanding the drivers of cash flow generation and,
in particular, the predictability and sustainability of cash flow. Moody's will conduct
financial analysis to determine an issuer's cash flow resilience in the event of an
economic downturn.

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Specific risk factors likely to be weighed in a given rating will vary considerably by
sector. Detailed methodology reports for all major sectors that we follow can be
obtained in the Rating Methodologies section of this site.

THE BENEFITS OF A MODDYS RATING

There are several ways in which investors use ratings that, in turn, provide value to
issuers. For many investors, ratings are a critical element in pricing securities and are
often used as a benchmark for setting investment guidelines. With dependable,
globally comparable opinions on credit risk in hand, institutions may be open to a
wider variety of securities investments from a broader array of firms.

1) Wider Access to Capital

Moody's credit opinions are widely disseminated, broadly used and clearly understood
by institutional investors in Asia and throughout the world, making an issuer's debt
more attractive to a wider range of potential buyers. In today's global markets, a rating
is effectively a "credit passport" that can provide access to both domestic and
international pools of debt capital.

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2) Financing Flexibility
This wider market access typically translates into reduced funding costs, particularly
for higher-rated issuers. The credibility of Moody's ratings may also allow rated issuers
to enter the capital markets more frequently and more economically and to sell larger
offerings at longer maturities.

3) Market Stability
Moody's ratings and research reports help to maintain and stabilize investor
confidence, especially during periods of market stress. For example, a news item could
adversely affect the prices of a company's outstanding bonds, even if the news has no
real impact on the bonds\' long-term creditworthiness. The reassurance of a Moody's
rating and accompanying analysis of the situation can help to alleviate investor
concerns about this type of "headline risk".

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APPENDIX 2 AMP CORE PROPERTY FUND INVESTOR FLYER

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AMP Capital

Core Property Fund

Why invest in property?

Property is a large and diverse asset class that includes a broad range of sub-sectors including
residential buildings, office buildings, business parks, hotels, industrial, shopping centres, retirement
villages, self storage, laboratories and hospitals. These investments may be accessed directly through
ownership vehicles such as trusts or syndicates and indirectly through property portfolios listed on
public markets. Investing in property can provide a number of benefits for investors:

Stable, reliable income streams

Global investment opportunities

Over the long term, the majority of property returns come

from rental income which is generally less volatile than capital
returns, as rents are contracted under a lease agreement.
To further reduce risk, a property portfolio is ideally comprised
of properties with good tenant diversification and staggered
lease maturities.

From a global perspective, as more countries introduce real

estate investment trust (REIT) structures, there are even
greater opportunities for global investment and portfolio
diversification. Since 1990 new entrants to the market have
included the UK, Germany, Singapore, Canada, Malaysia and
Japan and countries currently under consideration include
emerging markets Brazil, China and India.

Inflation hedging
Some real estate leases contain provisions for rental increases
to be indexed to inflation, while in other cases there is an
opportunity to increase rental rates whenever a lease term
expires and the tenant is renewed. Either way, real estate
income should keep pace with inflation, giving an investor
the potential to maintain real returns.

Tangible assets
Investing in property provides exposure to tangible assets
such as shopping centres and office buildings, and the value
of the land on which they are built, which generally performs
in line with key economic drivers such as consumer spending
and employment.

Diversification
As different property sectors have different risk and return
characteristics, investing in a strategic mix of listed and
direct property may provide investors with a better risk
adjusted return.
Listed property has the potential for higher returns and
is more liquid but has a higher correlation to equities, while
direct property provides excellent diversification benefits
due to its stable incomes and relatively low correlation with
other asset classes (traditional investment vehicles such
as stocks and bonds), helping to reduce volatility and risk
in an investment portfolio.

Improving investment conditions

As with many other asset classes, property was adversely
affected by the global financial crisis. The increased cost of
borrowing affected companies ability to purchase property
and refinance existing assets, rising unemployment decreased
demand for commercial property and affected firms ability
to lease space and there was negative investor sentiment.
All these factors led to a fall in valuations.
In AMP Capitals view we are now moving into a new phase
in the investment cycle which is expected to present some
significant opportunities in the coming years.
In the listed property markets, companies have moved
their focus from balance sheet issues to underlying real
estate fundamentals (demand, supply and pricing) and new
acquisitions to provide earnings growth. More equity issuance
and initial public offering (IPO) activity is expected in 2010,
generating new investment opportunities.
In direct property markets, valuations appear to be at or
close to a bottom as space demand and supply fundamentals
improve, selling pressure abates and investor demand
increases. In recent months some quality direct properties
have seen upward revaluations. In the Australian office sector,
vacancies are expected to peak in 2010/11.

Introducing the AMP Capital

Core Property Fund
The Fund offers investors access to a well-diversified property portfolio through a single fund.
It invests in direct and listed assets across local and global markets in key property sectors including
office, retail, industrial and residential.

AMP Capital Core Property Fund

Target
range

Direct property 3070%

Australian and global listed property 3070%

AMP Capital Wholesale Office Fund

Blackrock Wholesale

AMP Capital

AMP Capital Shopping Centre Fund

Indexed Australian

Global Property

AMP Capital Hedged Global Direct Property Fund

Listed Property Fund

Securities Fund

Underlying
Funds

Property
held
directly

Direct property opportunities

A diversified property portfolio

Australian listed property

As an open-ended hybrid property fund, the Fund invests

in a strategic mix of property assets, with a target asset
allocation of 50% in direct property and 50% in Australian
and global listed property.

The listed portion of the Fund provides investors with access

to liquid, high-yielding Australian property securities. The
Blackrock Wholesale Indexed Australian Listed Property Fund
offers a cost efficient way to access the Australian property
market through its passive index management strategy.

Direct property
The portfolio invests in premium, established blue-chip
property assets that would be unattainable for most retail
investors due to the amount of capital required. These assets
include some of the busiest shopping centres in Australia
such as Warringah Mall, as well as premium office buildings
such as NAB House and Angel Place in Sydney, and Collins Place
in Melbourne. The Fund also has a small exposure to global
property assets through the Global Direct Property Fund.
This underlying fund currently provides access to investments
in the North American and European property markets.

Global listed property

More than three quarters of the Australian listed property
market is concentrated in the top five stocks. Investing
in global listed property provides more diverse geographical
investment opportunities and access to a broader range
of property sectors, such as hotels and residential property
which are difficult to access in Australia. The AMP Capital
Global Property Securities Fund invests in real estate
investment trusts (REITs) and property securities listed on
stock exchanges in North America, Europe, and Asia Pacific.

Key Fund benefits

Blending direct and listed property
helps smooth returns
The Fund is designed as a full cycle investment with the aim
of providing investors with smoother, more stable performance
by diversifying between global and Australian listed property
and direct property. As direct and listed markets perform
differently at different times, this blend provides the potential
for more stable income and capital growth than investing
in just one type of property investment. This is demonstrated
in the below graph, which shows the performance of the
Fund compared to the Australian and global listed property
and Australian direct property sectors from 1 July 2005 to
31 December 2009.

Access to quality direct properties

The Funds direct property investments are in quality, well
located properties with lengthy and secure income streams.
For example, as at 31 December 2009 the average asset size
in the AMP Capital Shopping Centre Fund was $349 million
and the average vacancy rate was just 0.34%. In the AMP Capital
Wholesale Office Fund, 12 out of 14 properties are classified
as premium or grade A. This means properties must offer
good views, onsite undercover parking, access to an attractive
street setting, a lobby and high quality presentation and
maintenance.

Growth potential and liquidity from

investment in Australian and global REITs
Investing in listed property securities provides greater portfolio
liquidity than investing in direct property alone.

This allows the Fund to make tactical movements to take

advantage of market opportunities, both in Australia and
globally. It also provides the potential for capital growth
as the value of the properties in the portfolio (and their
share prices) rise.

Regular revaluations
Direct assets in the Fund are regularly revalued by a panel
of independent external valuers to more accurately reflect
the current value of the portfolio. This has enabled us to take
a more effective mark to market approach and provide
greater transparency to our investors.

Daily pricing with monthly withdrawals

In 2009 the Fund changed from quarterly to monthly
withdrawals to provide greater certainty and allow clients
more ready access to their funds. To the extent that available
funds are insufficient to meet the months withdrawal
requests, each request will be scaled back on a pro-rata basis.

Active management
Key to AMP Capitals success as a leading property manager
is our active management process. At Fund level we combine
long-term strategic asset allocation with short-term tactical
allocation between sectors and geographies. At direct property
level we not only operate physical assets, but also manage
responses to macro and micro drivers which involves tenant
management, leasing, efficiency and environmental upgrades.
With our affiliate AMP Capital Brookfield, we also apply active
management to our global listed property portfolio in a process
that covers screening and idea generation through to portfolio
construction, allowing timely responses to changes in market
conditions and optimisation of investment opportunities.

Relative returns since inception as at 31 December 2009

1.8
Return on $1 since 1 July 2005 (inception)
1.6

Mercer Australian
Unlisted Property
Fund Index

1.4
1.2

Core Property Fund

1.0
0.8

UBS Global Real

Estate Investors Index

0.6

ASX 200 Listed

Property Trust Index

0.4

2005

2006

2007

2008

Source: AMP Capital. Past performance is not a reliable indicator of future performance.

2009

Why AMP Capital?

AMPs involvement in property dates back to 1962 when
it completed Sydneys first sky-scraper, now home to the
AMP head office. From this time, AMP Capital has had
extensive experience managing, developing and leasing
property investments on behalf of superannuation funds
and wholesale investors, and today manages over
$20 billion in assets.
AMP Capital has a team of sector specific property
managers who are supported by experts from all areas
of property management. This wider team includes
specialists in debt advisory, investment strategy and
research and transactions, among others. We have over
80 property investment professionals based in Sydney.
Exposure to global listed property securities is via the
AMP Capital Global Property Securities Fund which is
managed by AMP Capital Investors and AMP Capital
Brookfield. Together they represent AMP Capitals
specialist global listed real estate and infrastructure
securities capabilities. We use on the ground investment
specialists based in Sydney, Chicago, London and Hong
Kong to identify the key opportunities in these regions.

The offer at a glance

Investment objective
To provide regular income and capital growth and
a total return (income and capital growth) on a rolling
three-year basis, after costs and before tax, above the
Funds performance benchmark while accepting a
medium level of volatility over the long term.

Benchmark
The weighted return of the indices listed below
(under weightings indicated):
Mercer/IPD Australian Pooled Property Fund Index 50%
S&P/ ASX 300 Property Accumulation Index 25%
UBS Global Real Estate Investors Index 25%

Suggested minimum investment timeframe

5 years

Distributions
Aims to pay quarterly

Buy/Sell spread
Buy spread: 0.17%
Sell spread: 0.17%

Management fee
1.1% plus a 20% performance fee for Class A clients and
1.4% plus a 20% performance fee for Class H clients.*
* The management costs include any management fee charged by the
underlying investment managers.

Contribution/withdrawal fee
Nil

Hedging policy
The Funds exposure to global listed property and global
direct property will be hedged back to Australian dollars.

Important note
Investors should consider the Product Disclosure Statement (PDS) available
from AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) for
the AMP Capital Core Property Fund before making any decision regarding
these funds. The PDS contains important information about investing in
the Fund and it is important that investors read the PDS before making any
decision whether to acquire, or continue to hold, or dispose of any units in
the Fund. Permanent Investment Management Limited (ABN 45 003 278 831)
(AFSL 235150) being the responsible entity of the Fund and the issuer of
units in the Fund. Permanent has not prepared this information and makes
no representation or warranty as to the accuracy or completeness of any
statement in it. To invest in the Fund, you and you clients will need the
Funds current Product Disclosure Statement (PDS) issued by Permanent
and available from AMP Capital on its website. The PDS contains important
information about investing in the Fund and its important you and your
clients read the PDS before making a decision about whether to acquire,
continue to hold or dispose of units in the Fund. This information has
been prepared for the purpose of providing general information, without
taking account of any particular investors objectives, financial situation or
needs. You and your client should, before making any investment decisions,
consider the appropriateness of the information in this document, and seek
professional advice, having regard to the investors objectives, financial
situation and needs.
The Lonsec Limited (Lonsec) ABN 56 061 751 102 rating (assigned February
2009) presented in this document is limited to General Advice and based
solely on consideration of the investment merits of the financial product(s).
It is not a recommendation to purchase, sell or hold the relevant product(s),
and you should seek independent financial advice before investing in this
product(s). The rating is subject to change without notice and Lonsec assumes
no obligation to update this document following publication. Lonsec receives
a fee from the fund manager for rating the product(s) using comprehensive
and objective criteria.

Contact us
Advisers
To find out more about the AMP Capital
Core Property Fund, or how your clients can
access this investment opportunity, please
contact your AMP Capital Key Account
Manager or call our Adviser Services team
on 1300 139 267
Personal Investors
To find out more about the AMP Capital
Core Property Fund, please talk to your
adviser or call us on 1800 188 013.
Or visit our website
[Link]

NS5460 03/10

To the extent that any ratings, opinions or other information of Standard

& Poors Information Services (Australia) Pty Ltd (ABN: 17 096 167 556,
Australian Financial Services Licence Number: 258896) (Standard & Poors)
constitutes general advice, this advice has been prepared by Standard
& Poors without taking into account any particular persons financial or
investment objectives, financial situation or needs. Before acting on any
advice, any person using the advice should consider its appropriateness
having regard to their own or their clients objectives, financial situation
and needs. You should obtain a Product Disclosure Statement relating to
the product and consider the statement before making any decision or
recommendation about whether to acquire the product. Past performance
is not a reliable indicator of future performance. Ratings can change or
cease at any time and should not be relied upon without referring to the
meaning of the rating. For more information regarding ratings please call
S&P Customer Service on 1300 792 553 and also refer to Standard & Poors
Financial Services Guide at [Link]. Each analytic product
or service of Standard & Poors is based on information received by the
analytic group responsible for such product or service. S&P and Standard
& Poors are trademarks of The McGraw-Hill Companies, Inc. 2009
Standard & Poors Information Services (Australia) Pty Limited

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APPENDIX 3 BALANCED FUNDS FACT SHEETS

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Identifier: DFP 1203

BT Multi-manager
Balanced Fund
June 2011

Fund objective
The Fund aims to maximise returns above
inflation with a medium risk of fluctuations in
capital values in the short term and provide an
overall return which exceeds its benchmark over
five years or more.
Investment approach
The Multi-manager funds allow you to select a
single investment option that diversifies across
asset classes, investment managers and
investment management styles. This
diversification helps reduce overall risk and aims
to improve consistency of returns by minimising
the impact on overall performance resulting from
any one style, asset class or manager.

Fund facts
Minimum suggested investment period
Date of inception
Risk profile
Product size ($m)
Management fee
APIR code

3 years
March 2003
Balanced
$196.9
1.80% pa
BTA0077AU

Performance vs benchmark (% pa)

40.00
Fund

35.00

Benchmark

30.00
25.00
20.00

Manager selection
The BT Multi-manager funds are built, monitored
and rebalanced by Advance Investment
Solutions who research, select and blend
investment managers from around the world and
actively manage the strategy, manager selection
and performance of the funds. Advance
Investment Solutions regularly meets with the
investment managers and conducts an intense
investigation of everything, from their investment
philosophy and current market views, to how well
the investment managers team is working
together or how they would react in periods of
high volatility.
Latest portfolio update
Growth assets posted modest falls over the June
quarter as investor risk aversion stemming from
social unrest, political instability and economic
fragility led investors to realign their portfolios in
favour of defensive assets. The Fund continued to
run a slight overweight position to growth assets
during the quarter, with the holdings of equities
and commodities above the neutral benchmark
allocation. The performance of the Fund was in
line with the benchmark return with sector
allocation variance having little impact on overall
performance whilst manager selection decisions
detracted slightly from the Funds return. The
largest positive contribution by asset class from
manager selection came from within active global
equities and diversified property.

15.00

10.6010.81

10.00

5.44

5.00

0.91

2.22

7.49

2.43
0.08

0.00
-5.00

-1.60 -1.19

-10.00
3 months

1 year

3 years

5 years

Since inception

Investment returns are retail net of fees.

The benchmark for the Fund is created from a blend of indices based on the
Funds exposure to different asset classes. Details of the particular market
indices used for the Funds benchmark can be found on BT Online.

Asset allocation

Australian Equities 32.80%

International Equities 21.70%
Asian Equities 2.98%
Defensive Alternative Assets 2.07%
Growth Alternative Assets 9.85%
Listed Property 6.13%
Fixed Interest 4.89%
Int Fixed Interest 9.89%
Cash 9.68%

[Link]

The second quarter of 2011 delivered lacklustre returns with

global industrial production being disrupted due to the natural
disasters suffered by Japan. Also affecting investor
confidence was the deteriorating social, political and
economic conditions of southern Europe, Northern Africa and
the Middle East. This led to the rotation in favour of defensive
assets at the expense of growth assets.
Global equity markets registered modest falls in the second
quarter returning -2.8% as measured by the MSCI World ex
Australia Index (in Australian dollar terms). The Australian
dollar moved 3.8% higher against the US dollar, whilst on a
trade-weighted basis the Australian dollar appreciated 2.0%.
The Australian equity market performed poorly as the strong
Australian dollar, heightened market volatility caused by
global natural disasters and global political and social unrest
led to investors reducing their risk appetites. The S&P/ASX
200 Accumulation Index declined 4.0% over the quarter,
underperforming both the local currency and the unhedged
global equities indices.
Global property markets did manage to hold onto some of the
gains from the first quarter, although struggled during the
quarter, making up losses in the last week of June and
posting a return of 2.9% (hedged in Australian dollars). In
addition, the macro uncertainty may have increased the
likelihood of continued low interest rates in the developed
economies, providing further support for real assets with
stable income, such as real estate.

Managers

Australian Equities

International Equities

Property

BT
Northcape
Ausbil
Schroders

AQR
MFS
Trilogy
Tradewinds
Lion

Alleron
Celeste
Contango
Tribeca

Schroders
Lazard
Mellon
State Street

Perennial
European
Investors
CBRE

Alternative Assets

Advance
Alternative
Strategies

Australian Fixed
Interest

CFS

Strong cash flows in the first part of the quarter, and merger
and acquisition activity in the listed real estate market
provided further support for global REIT share prices.
Australian LPT Index underperformed global property stock
having recorded a fall of 0.5% over the quarter.

International Fixed
Interest

Standish Mellon
Franklin
Templeton

The Australian bond market posted a slight gain over the

quarter as bond yields moved lower across the entire curve.
The RBA kept the official cash rate unchanged at 4.75% with
further rate hikes anticipated sometime over the remaining
months of 2011. The UBS Australian All Maturities Index
posted a gain of 2.3%.

Cash

IMS
Kapstream

Credit Suisse
Grosvenor

Perennial

Wellington

Global sovereign bond yields moved lower over the quarter as

economic data out of the US and leading European nations
showed signs of sluggish economic conditions. This led to
investor rotation, into the relative safety of global bonds and
out of risky growth assets. The Barclays Global Aggregate
Bond Index (Hedged) returned 2.9% over the quarter.

BT Funds Management Limited ABN 63 002 916 458 is the responsible entity of the Multi-manager Balanced Fund (Fund) and is the issuer of units in the Fund.
A Product Disclosure Statement (PDS) is available for the Fund and can be obtained by calling 1800 813 886 or online at [Link] . You should obtain
and consider the PDS before deciding whether to acquire, or continue to hold, units in the Fund. This fact sheet has been prepared without taking account of
your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your
objectives, financial situation and needs. Total returns for the Fund are calculated to the last day of each month using exit prices. Total return figures assume
distributions are reinvested and issuer fee and expenses are deducted but contribution fees (where payable) and taxes are not. Returns are historical and past
performance is not a reliable indicator of future performance. This fact sheet is updated quarterly and is accurate at the time of publishing. We may change the
investment characteristics of the Fund at any time.

August 2011
Fund facts

Fund benefits

Investment objective: To provide investors with long term capital growth and income
through investment in a diversified portfolio with an emphasis on Australian and
international share investments.

Provides investors with access to a diverse

range of growth and income producing assets.
Active management and asset allocation
techniques are employed in order to further
enhance the fund's return and manage risk.

Benchmark:
Balanced Growth Index
Mgmt cost:
1.95%
0.34% / 0.00%
Buy / Sell spread:
Investment style:
Active, fundamental, disciplined, value
Suggested minimum investment period: Five years or longer

Total returns % (after fees) as at 31 August 2011

APIR

1 mth

3 mths

6 mths

1 yr

Perp. WealthFocus Investments

PER0100AU

-1.6

-4.3

-4.1

2.9

Perp. WealthFocus Investment Advantage

PER0036AU

-1.5

-4.2

-4.1

Perp. WealthFocus Super

PER0017AU

-1.4

-3.8

-3.6

Perp. WealthFocus Pensions

PER0015AU

-1.5

-4.1

-3.9

Perp. WealthFocus Term Allocated Pension

PER0334AU

-1.5

-4.1

-3.9

-1.7

-4.1

-4.1

Balanced Growth Index

3 yrs pa 5 yrs pa 7 yrs pa 10 yrs pa

-1.5

-0.3

3.8

3.9

2.8

-1.5

-0.5

3.7

3.7

2.9

-0.9

0.0

3.9

3.9

3.2

-1.0

0.1

4.3

4.3

3.2

-1.0

0.1

4.3

4.3

2.7

0.2

1.1

5.1

4.6

Past performance is not indicative of future performance. Returns may differ due to different tax treatments.

Growth of $10,000 since inception (WFI Fund)

Portfolio sectors

$24,000

Australian shares, 31.5%

$20,000

International shares, 28.1%

$16,000

Property, 5.8%
$12,000

Fixed Income, 9.9%

$8,000
May-99

May-01

May-03

Fund

May-05

May-07

May-09

May-11

Cash & Enhanced cash, 7.8%

Benchmark

Other investments, 16.8%

Top 10 stock holdings

Commonwealth Bank of Australia
BHP Billiton Limited
Westpac Banking Corporation

Asset allocation ranges

Telstra Corporation Limited

Min.

Target

Max.

ANZ Banking Group Limited

Australian shares

10

28

50

Coal & Allied Industries Limited

International shares

10

28

50

Orica Limited

Property

15

Fletcher Building Limited

Fixed income

10

35

Alumina Limited

Enhanced cash

13

30

Rio Tinto Limited

Other investments

16

30

Market commentary
Global equities fell 4.8% in August. A slowdown in global growth and concerns over
sovereign debt in Europe sent stocks lower. The Australian market fell by 10.0% early in
the month, before rallying to end the month down 2.0%. This was the fifth consecutive
month of negative performance. The August domestic reporting season delivered mixed
results with resources experiencing the largest increases in profit growth, followed by the
banks.
Credit markets endured one of the most volatile months in August since the fallout from
Lehman Brothers. Amid heightened volatility and extreme risk aversion, August observed
credit spreads reflective of a broad-based global recession.

What are...?
Active asset allocation is a portfolio management
strategy that changes a portfolios asset
allocation to take advantage of market conditions
in the short term. Using a disciplined active asset
allocation process offers the potential for both
enhanced returns and reduced levels of risk.

Asset allocation

Why Perpetual

Asset allocation added value over the month. Allocation to equities was initially held
slightly underweight. However, the equity market sell off early in the month caused
equities to become more attractively valued. This resulted in the portfolio moving to a
neutral equity position. Momentum remained negative throughout most of the period.

Perpetual is one of Australias most experienced

investment services groups, with an enduring
passion for protecting and growing our clients
wealth.

We started the month with a small overweight to fixed income, but remained close to
neutral for the remaining period. Over the month Australian bond prices rallied sharply
following the downgrade of the US Governments credit rating. The resulting fall in yields
meant that bonds became expensive relative to inflation expectations.

Stock selection
Stock selection was positive for equities. One of the reasons the Australian equities
portfolio outperformed was its holding in Coal & Allied. During the month Coal & Allied
received a joint takeover offer from Rio Tinto and Mitsubishi Corporation at $122 per
share. The offer was later increased to $125 per share, valuing the company at $10.8
billion.
The global equities portfolio also outperformed. This was due to its more defensive
positioning. Contributors to performance included Johnson & Johnson, Nestle, Tesco
PLC, and Philip Morris. Johnson and Johnson delivered better sales growth in its
Pharmaceutical and Consumer segments and is one of the best-managed large-cap
healthcare companies.
The fixed income portfolio underperformed. An underweight position to supranationals
and semi-government securities contributed to performance during the month. The
portfolios overweight to credit detracted from performance. This was due to a broad
based widening of credit and swap spreads. This was partially offset by strong running
yields.

Outlook
We are mindful that global equities face some challenges in the short to medium term.
The US Federal Reserve has the ability to implement monetary easing in the form of QE3
to appease the market, but Europe is likely to remain the focus of uncertainty as the
growth picture deteriorates perhaps to the point of tipping back into a mini-recession. Asia
and China look more favourable in this context and we expect that when reflation does
return, emerging markets and commodities will bounce back meaningfully.
Domestically, companies continue to be impacted by the strength of the Australian dollar,
a frugal consumer and rising input costs. We continue to research and invest in
companies with recurring earnings, low debt and sound management which we believe
are well placed to add value over the medium to long-term.

Founded in Sydney in 1886 as Perpetual

Trustees, weve helped generations of
Australians invest and manage their wealth
through all market conditions.

Perpetual process
Perpetuals investment philosophy for investing
in balanced portfolios is to focus on the
fundamental drivers of returns from quality
investments rather than on asset classes
themselves. We believe investment in internal
capability where we have the demonstrated
ability to consistently add value is a lower risk
and more reliable approach to meeting investors
objectives. We also believe that our focused,
active approach to asset allocation and our
proven disciplined investment style has the
ability to add value to investors over time.

Did you know?

When making asset allocation decisions, we
consider three key indicators being cycle, value
and technical. This process evaluates the impact
of the earnings cycle on Australian equities, the
business cycle on domestic bonds, and analyse
valuations, while also incorporating market
sentiment through technical analysis. These
indicators combine to either increase exposure to
an asset class when market conditions become
favourable or reduce exposure if market
conditions are becoming adverse.

The outlook for the credit markets remains neutral. Valuations are attractive relative to
historic levels. Credit fundamentals remain stronger than current spreads suggest.
Domestic banks and corporates are far less exposed to the troubles facing a number of
offshore counterparts. Despite having high capital levels and stronger funding profiles,
subdued risk appetite has resulted in a broad based sell off among credits. These positive
factors are countered by the heightened market volatility, which has been caused by an
increase in risk aversion.

This publication has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL No 234426. It is general information only and is not intended to
provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your
circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this [Link] PDS for the relevant fund, issued by PIML,
should be considered before deciding whether to acquire or hold units in that fund. The PDS can be obtained by calling 1800 022 033 or visiting our website [Link]. No
company in the Perpetual Group* guarantees the performance of any fund or the return of any investor's capital. Total return shown for the fund(s) have been calculated using exit prices
after taking into account all of Perpetual's ongoing fees and assuming reinvestment of distributions. No allowance has been made for entry or exit fees or taxation (except in the case of
superannuation funds). Past performance is not indicative of future [Link] Balanced Growth Fund gains its exposure to Australian Shares by investing in an underlying Australian
Share Fund/s which primarily invests in Australian listed or soon to be listed shares but may have up to 20% exposure to stocks outside Australia. The investment guidelines showing the
Fund's maximum investment in international shares do not include this potential additional exposure. Short positions may be part of the underlying Australian Share Fund's strategy.
Currency hedges may be used from time to time.
* Perpetual Group means Perpetual Limited ABN 86 000 431 827 and its subsidiaries.
The following funds are not open to new investment: Perpetual's Balanced Growth Fund Nil Entry Fee Option.
Fund information in this document is relevant to the Wholesale option unless stated.

Further information
Adviser Services 1800 062 725
Investor Services 1800 022 033
Email investments@[Link]
[Link]

United Capital Balanced Fund

Investment Proile
Investment objective
To provide capital growth of your investment over the
medium to long term by investing in a diversiied portfolio
of growth and defensive assets, and to achieve a total return
after fees in excess of the funds benchmark1 over a rolling
5 year period.

Fund facts
Fund start date

12 April 2002

Distribution frequency

Quarterly

Investment timeframe

3 years +

Estimated management cost

0.77%2

Investment strategy

Performance Fee

0.06%3

The fund generally gains its exposure to a diversiied

portfolio of investments through a mix of investment
managers. The balanced orientation of the fund means it
has a similar exposure to growth assets (such as Australian
and international property and equities and alternative
growth), and defensive assets (such as cash, ixed interest
and alternative defensive).

Buy/Sell spread

0.45% 4

The fund is authorised to utilise approved derivative

instruments for risk management purposes subject to the
speciic restriction that the derivative instruments cannot
be used to gear portfolio exposure.
The underlying investment managers may utilise strategies
for the management of currency exposure. The level of
currency hedging used for the fund will vary from time to
time. The fund has the capacity to change the level and
nature of the currency overlay to manage the currency risk.

Performance %5
1 year return as at 30 June of each inancial year

Notes
1 The funds benchmark incorporates the applicable indices for each asset class
weighted against the funds neutral asset allocation. Refer to the Asset class
benchmark indices table for more information.
2 Estimated management cost before performance fee. This is an estimate that
includes the responsible entity fee, the investment manager fee and estimates
of the underlying investment management fee and other fund expenses. The
amount payable may be more or less than the estimate.
3 This is an estimate. The amount payable may be more or less than the estimate.
4 Represents the full margin between the buy and sell spread.
5 Past performance are net of investment manager fees and gross of tax.
If you are a superannuation fund member, you may be investing in the fund
via a pooled superannuation trust (PST), therefore performance relating to your
investment may vary due to the efect of fees and income tax applied at the PST
level. Please refer to the relevant fund PDS to check if this applies to you and for
information about the funds investment process.
6 Property asset sector may include exposure to Australian direct property and
Australian and international property securities.
7 The MSCI World ex-Australia Index in AUD Hedged may be used from time to
time, depending on the strategic hedging ratio applied to the international
shares portfolio. The benchmark for international shares may change in future to
the MSCI All Countries World ex-Australia Index in AUD.
8 This benchmark is an asset weighted average return predominately made up of
the Commonwealth Property Fund and the AMP (Capital Investors) Investment
Linked Superannuation - Australian Core Property Portfolio.

2010

2009

2008

2007

8.97

10.95

-11.78

-9.93

13.64

Investment guidelines
Range

Strategic (neutral) allocation

22%
18%
10%
35%
5%
5%
5%

10-35%
5-30%
0-20%
25-45%
0-15%
0-20%
0-15%

Manager information
United believes that no single investment manager can
provide superior investment performance across all asset
classes. Because of this, United adopts the multi-manager,
sector-specialist investment approach by outsourcing
the security selection function to a range of high quality
investment managers who United believes have specialised
skills and expertise at managing investments within a speciic
asset class. The sector specialist investment approach is
focussed on harnessing an investment managers strengths
and avoiding their weaknesses.

2011

02

04

06

08

Australian shares
International shares
Property6
Diversiied ixed interest
Cash & short term securities
Alternative growth
Alternative defensive

100

Asset class benchmark indices

Asset class

Benchmark

Australian
shares

S&P/ASX 300 Accumulation Index

International
shares

MSCI World ex-Australia Index in AUD7

Direct
property

InTech Weighted Direct Property Index8

Australian
listed
property

S&P/ASX 300 Property Accumulation Index

International
listed
property
Diversiied
ixed interest
& Alternative
defensive
Cash &
short term
securities
Alternative
growth

UBS Global Real Estate Investors ex-Australia

Index in AUD Hedged TR
50% UBSA Composite Bond Index
50% Barclays Capital Global Aggregate Bond
Index (hedged in AUD)
UBSA Bank Bill Index
MSCI World ex-Australia Index in AUD

Last updated | June 2011

United Capital Balanced Fund

Investment Proile

Underlying sector managers9 as at 30 June 2011

Sector

Manager

Australian
equities

AllianceBernstein Australia Ltd

4.15

BlackRock Investment Management

(Australia) Ltd

3.63

Integrity Investment Management

4.21

Legg Mason Australia Asset

Management Ltd

1.38

Merlon Capital Partners

1.79

Perennial Investment Partners Ltd

4.24

Solaris Investment Management Ltd

4.83

Sector

Manager

Alternative
equities
(continued)

Newbury Partners LLC

0.02

Performance Equity Management LLC

0.04

BNY Mellon Asset Management

1.56

Other
Alternative
debt

Credit Suisse Asset Management

(Australia) Ltd

0.44

International Acceptance Ptd Ltd

0.11

Gresham Property Funds Management

Ltd

0.08

Axiom International Investors LLC

3.61

AMP Capital Investors Ltd

0.80

LSV Asset Management

4.17

RARE Infrastructure

0.41

Perennial Investment Partners Ltd

0.77

EIG Global Energy Partners

0.02

State Street Global Advisors, Aust, Ltd

8.89

Wellington Management Company, LLP

2.20

19.64
Fixed
interest

0.51

2.57

24.23
International
equities

Loomis, Sayles & Company LP

3.18

Perennial Investment Partners Ltd

10.82

PIMCO Australia Pty Ltd

10.50

1.86
Notes
9 Underlying manager allocations and asset allocations relect the combined
indirect exposure of the Funds holding in other IOOF Group unit trusts and/or
direct investments.

24.50
Property

Challenger Managed Investments Ltd

1.54

Colonial First State Global Asset

Management

0.42

1.96
International
property

Cohen & Steers Capital Management Inc

0.91

Perennial Investments Partners Ltd

2.05

2.96
Cash

Perennial Investment Partners Ltd

4.05

United Funds Management Ltd

17.13
1.11

IOOF Investment Management Ltd

22.29
Alternative
equities

Pantheon Ventures (Guernsey) Ltd

0.08

Lombard Partners International LLC

0.20

Crown Global Secondaries II PLC

0.08

Mount Kellett Capital Partners LP

0.08

United Funds Management Ltd

Investor Services 1800 333 700

Website [Link]

Important note: This Investment Proile has been prepared on behalf of the IOOF group, which consists of IOOF Holdings Ltd ABN 49 100 103 722 (IOOF) and its
related bodies including IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524 and Australian Executor Trustees Limited ABN 84 007 869 794
AFSL 240023. It is based on general information contained in the underlying fund Product Disclosure Statement (PDS) issued by United Funds Management Ltd,
which is available at [Link].
The Investment Proile is not intended to represent investment or professional advice as it does not take into account your individual objectives, inancial circumstances or needs.
You should carefully review the PDS and consider consulting a inancial adviser before making a decision about whether this particular investment option is appropriate for you. IOOF
and its related bodies corporate are not liable for any loss or damages arising as a result of reliance placed upon the contents of this Investment Proile. The information is given in
good faith and believed to be accurate at the time.
Last updated | June 2011

Insert page 1 of

APPENDIX 4 TIME VALUE OF MONEY

Document: Module 2: Investments Planning

Identifier: DFP 1203

Document: Module 2: Investments Planning

Identifier: DFP 1203

TIME VALUE OF MONEY

In this appendix, we revisit the time value of money examples and show you how to
answer similar questions using both a financial calculator and/or the maths formulae
that underpin the spreadhseets we used in the notes to this module.
Lets now return to the example we used in the notes where we invested $1,000 for
four years.
We calculated what we would require in four years time if the interest rate was 8%
p.a. We worked out that the future value of $1,000 invested each year at a rate of 8%
p.a. was equivalent to receiving a lump sum of $1,360.49 at the end of the 4th year.
This sum of money comprised the initial sum of money, $1,000 plus interest earned
over the four year period.

Initial sum

= $1,000.00

Interest in year 1

= 8% x $1,000

$ 80.00

Interest in year 2

= 8% x ($1,000 + $80)

$ 86.40

Interest in year 3

= 8% x ($1,000 + $80 + $86.40)

$ 93.31

Interest in year 4

= 8% x ($1,000 + $80 + $86.40 + $93.31) =

$ 100.78
$1,360.49

Using a financial calculator and this example, we can input the following values to
determine the future value of the investment:
PV

= amount of the present sum of money ($1,000)

= interest rate per period (8%)

= number of periods (4)

Document: Module 2: Investments Planning

Identifier: DFP 1203

If we select the future value key (FV) on the financial calculator, we will know that if
our opportunity cost is 8% we will require $1,360.49 in four years' time to be
indifferent between receiving the money today and waiting for the four years.
We can also use a formula to determine the future value of a single amount invested
today. This formula is as follows:
FV = PV(1 + r)n
where:
PV

amount of the present sum of money ($1,000)

interest rate per period (8%)

number of periods (4)

FV

Future or accumulated value

$1,000 (1 + 0.08) 4

$1,360.49

Document: Module 2: Investments Planning

Identifier: DFP 1203

FUTURE VALUE OF SINGLE SUMS

Because of the nature of compounding, we can see why money is said to have a time
value: a dollar in one time period has a different value from a dollar received or paid in
a different time period. This same notion of the time value of money can enable us to
determine what some amount to be received at a future date is worth in todays
money terms. Comparing the future value of two cash flow streams or comparing the
present value, i.e. the value in todays money terms of those same cash flow streams
will always result in the same conclusion as to which is optimal.

Example
Sarah asks your advice about two investment options. Investment Option A and Option
B will generate the following cash flows.
Option A
End yr.1
Nil

End yr.2

End yr.3

End yr.4

End yr.5

Nil

$27,000

$8,000

End yr.2

End yr.3

End yr.4

End yr.5

Nil

Nil

Nil

$40,000

Nil

Option B
End yr.1
Nil

In order to compare these investment options it is necessary to consider the cash

flows at a common time period. If we compare these two investment options at the
end of Year 5, that is, the future value of both Option A and Option B, we can evaluate
which investment option is preferable.

Document: Module 2: Investments Planning

Identifier: DFP 1203

Using a financial calculator and this example, let us assume we require a return of 8%.
We can input the following values to determine the future value of the investment:
Option A
PV

= amount of the initial sum of money ($27,000)

= required return or interest rate per period (8%)

= number of periods (2)

If we select the future value key (FV) on the financial calculator, we will know that if
our required return is 8%, $27,000 to be received in three years' time is equivalent to
receiving $31,492.80 in five years' time.
Plus
PV

= amount of the initial sum of money ($8,000)

= required return or interest rate per period (8%)

= number of periods (1)

If we select the future value key (FV) on the financial calculator, we will know that if
our opportunity cost is 8%, $8,000 to be received in four years' time is equivalent to
receiving $8,640 in five years' time.
The future value of both cash flows, $27,000 to be received in 3 years' time and $8,000
to be received in 4 years' time is equivalent to receiving a total of $40,132.80 in 5
years' time ($31,492.80 + $8,640).
Option B
The future value of $40,000 to be received in five years time is $40,000. Our advice to
Sarah would explain that because of the time value of money, she is better off
accepting Option A because it is providing her with more money in future dollar terms.

Document: Module 2: Investments Planning

Identifier: DFP 1203

PRESENT VALUE OF SINGLE SUMS

Present value questions require us to consider what is the equivalent value in
todays money terms of cash to be received at some time in the future? For
example, it might be required for issues like: a client wishes to go on a cruise in 5
years time. The cruise will cost approximately $8,000. How much should be
invested now at an interest rate of 7 per cent per annum in order to ensure these
funds will be available?
Alternatively, a client wishes to provide for their childrens education and needs
$12,000 per year for 6 years starting 4 years from now. If interest rates were 6.5%
p.a. how much would your client need to invest now in order to make these funds
available? What if your client could save a regular amount beginning now in order
to make those funds available? How much would need to saved each year?
To see how we use a financial calculator to answer present value questions, we will
return to the example of Sarah and the choice between Option A and Option B.
If we had compared investment Option A with investment Option B on the basis of the
value in todays dollar terms, we would arrive at exactly the same conclusion as we did
using the future value calculation. The numbers will of course be different because we
will be comparing the value of the investments in todays dollars but the conclusion
will be the same.
We can input the following values to determine the present value of the investment.
Option A
FV

= amount of the future sum of money ($27,000)

= required return or interest rate per period (8%)

= number of periods (3)

If we select the present value key (PV) on the financial calculator, we will know that if
our required return is 8%, $27,000 to be received in three years time is equivalent to
receiving $21,433.47 in todays money terms.

Document: Module 2: Investments Planning

Identifier: DFP 1203

Plus
FV

= amount of the future sum of money ($8,000)

= required return or interest rate per period (8%)

= number of periods (4)

If we select the present value key (PV) on the financial calculator, we will know that if
our required return is 8%, $8,000 to be received in four years time is equivalent to
receiving $5,880.24 in todays money terms.
The present value of both cash flows, $27,000 to be received in 3 years time and
$8,000 to be received in 4 years time is equivalent to receiving $27,313.71 in todays
money terms ($21,433.47 + $5,880.24).
Option B
FV

= amount of the future sum of money ($40,000)

= required return or interest rate per period (8%)

= number of periods (5)

If we select the present value key (PV) on the financial calculator, we will know that if
our required return is 8%, $40,000 to be received in five years time is equivalent to
receiving $27,223.33 in todays money terms.
Again our advice to Sarah would be to explain that because of the time value of
money, she is better off accepting Option A. In this analysis it is because it is providing
her with more money in todays dollar terms.
After taking into account the time value of money, the present value of both cash
flows, $27,000 to be received in 3 years' time and $8,000 to be received in 4 years'
time is equivalent to receiving $27,313.71 in todays money terms. For Option B,
receiving $40,000 in five years time is equivalent to receiving $27,223.33 in todays
money terms.

Document: Module 2: Investments Planning

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The formula to determine the present value of future sums of money can be used to
assess Sarahs question. This formula is the inverse of the formula used to determine a
future value from a present sum.
=

PV

FV
(1 + r) n

where
FV = amount of the future sum of money
r

= required return or interest rate per period

= number of periods

Applying this formula to the example for Sarah , we can determine the present value
of each cash flow stream.
Option A
PV

= $27,000
+
(1 + 0.08) 3

$8,000
(1 + 0.08) 4

= $27,313.71

Option B
PV

= $40,000
(1 + 0.08) 5
= $27,223.33

Obviously, our advice to Sarah is identical to that which we derived by using a financial
calculator.

Document: Module 2: Investments Planning

Identifier: DFP 1203

ANNUITIES
So far we have only considered the future value and the present value of single sums
of money. A related issue is the determination of the future value and present value
of an identical stream of receipts/payments occurring each and every period for a
specified time. A series of cash flows that are identical in amount and are occurring for
consecutive time periods is called an annuity.
Consider the following annuity with an interest rate required of 7%:

End
Yr 1

End
Yr 2

End
Yr 3

End
Yr 4

End
Yr 5

$500

$500

$500

$500

$500

If we wish to find the accumulated value (future value) of this annuity at the end of
five years, we can input the following values in our financial calculator to determine
the future value of the investment:
PMT

= amount of the annuity ($500)

= interest rate per period (7%)

= number of periods (5)

If we select the future value key (FV) on the financial calculator, we will know that if
our opportunity cost is 7% we will require $2,875.37 in five years time to be
indifferent between receiving $500 each year for 5 years and receiving $2,875.37 in
five years time.
Alternatively, we can use the formula for the future value of an annuity to determine
the accumulated value at the end of the five years. This formula is as follows:

Document: Module 2: Investments Planning

Identifier: DFP 1203

FV = PMT [(1 + r ) n 1]
r
FV = $500[(1+ 0.07)5 1]

0.07

= $2,875.37

Using the same example we can determine the present value of this income stream.
To calculate the present value we would input the following values into a financial
calculator or use the formula for the present value of an annuity.

PMT

= amount of the annuity ($500)

= interest rate per period (7%)

= number of periods (5)

If we select the present value key (PV) on the financial calculator, we will know that if
our opportunity cost is 7% we would be indifferent between receiving $2,050.10 today
or receiving $500 each year for 5 years.
Using the formula,

PV = PMT [1 (1 + r ) n ]
r

PV = $500 [1 (1 + 0.07 )
0.07

PV =

$2,050.10

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What if the cash flows do not commence at the end of year one?
The formulae we have used so far in this module and most financial calculator settings
assume the first cash flow will occur at the end of year 1 (period 1).
A complication can arise when the first cash flow is not at the end of the first year (or
period) but instead occurs immediately. An example of this might be the payment or
receipt of office rental which is usually paid (received) in advance.
Consider the following annuity with an interest rate required of 7%:

Yr 0

End
Yr 1

End
Yr 2

End
Yr 3

End
Yr 4

$500

$500

$500

$500

$500

Like the earlier example, there are still 5 regular payments (receipts) of $500. The
difference is however, the first of these payments (receipts) is today and the last
payment (receipt) is at the end of year 4. Consequently, we cannot input the number
of periods as n = 5 periods because the formula and financial calculator settings
assume the first cash flow will occur at the end of year 1 (n period 1).
Finding the present value of the regular payments described in this example requires
us to use a 2 step process. First we input the number of periods n = 4 periods to
determine the present value of those cash flows occurring at the end of years 1 ,2, 3
and 4 and then we add the immediate payment (receipt) of $500 to our answer as
follows:
To calculate the present value we would input the following values into a financial
calculator or use the formula for the present value of an annuity.
Step 1: Calculate the present value of the 4 regular amounts to be received at the end
of years 1, 2, 3 and 4.
PMT

= amount of the annuity ($500)

= interest rate per period (7%)

= number of periods (4)

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If we select the present value key (PV) on the financial calculator, we will know that if
our opportunity cost is 7% we would be indifferent between receiving $1,693,61 today
or receiving $500 each year for 4 years.
Step 2: Add the $500 amount to be received today (Year 0) to the answer from Step 1.

$1,693.61 + $500 = $2,193.61

Using the formula,
Step 1:
PV = PMT [1 (1 + r ) n ]
r

PV = $500 [1 (1+ 0.07)4 ]

0.07
PV =

$1,693.61

Step 2: $1,693.61 + $500 = $2,193.61

Why is the present value in example 2 ($2,193.61) more than the present value in
example 1 ($2,050.10) given both examples were based on a regular payment (receipt)
of $500 for 5 years (periods)?
The answer to this question is because the cash flows were paid (received) earlier in
our second example. Consequently, the time value of many places a greater value on
cash flows that occur earlier.

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APPLICATION OF TIME VALUE OF MONEY

Understanding the concepts of compounding and the time value of money enables us
to consider the types of questions that might commonly be asked of a financial
planner.
Consider the following example that we used earlier in this module.
Example
Andrew has just turned 40 years. He has sought your advice about his plans for
retirement. Andrew would like to retire at age 65 years and he wants to have $1.5
million in an investment account at age 65 years in order to maintain his current
lifestyle. He has determined that he can afford to invest $12,000 at the end of each
year (for the next 15 years) towards his retirement. At age 55 years he will need to
withdraw $40,000 as a lump sum, because he intends to take his wife, his children and
his two grandchildren on a cruise. If Andrews retirement account earns 11% per
annum, compounded annually, how much will Andrew need to deposit into the
account each year for the last ten years (between age 55 years and age 65 years) to
meet his goal of having $1.5 million?
It may be useful to draw a timeline in order to see when the various cash inflows and
cash outflows are likely to occur. In the table below we have drawn a timeline.
When calculations such as these are made, it is assumed that the cash flows occur at
the end of each period (year).

Age

40

41

42

43 -

53

54

55

56

57

58

59

60

61

62

63

64

65

End of yr

3 -12

13

14

15

16

17

18

19

20

21

22

23

24

25

12

12

12

12

12

12

Cashflow
($,000s)

(40)

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1500

To provide the advice to Andrew, we can break down the calculation into 3 steps

Step 1 - Determine how much Andrews account will be worth at age 55

years.

Step 2 - Determine the value of the amount left in the account at age 55
years if it accumulates interest until Andrew reaches age 65 years.

Step 3 - If Andrew needs to accumulate extra funds in the years between

age 55 and age 65 years, how much will he need to deposit into his
retirement account each year?

Solving the problem

Step one - Determine how much Andrews account will be worth at age 55 years.
We know:
PMT

= amount of the annuity ($12,000)

= interest rate per period (11%)

= number of periods (15)

If we input this data and then select the future value key (FV) on the financial
calculator, we will know that the value of Andrews account in 15 years time when he
turns 55 years will be $412,864.
Once we deduct the cost of the cruise ($40,000) the balance of the account will be
$372,864.

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Step two - Determine the value of the $372,864 left in the account when Andrew
reaches age 65 years.
We know:
PV

= amount of the present sum of money ($372,864)

= interest rate per period (11%)

= number of periods (10)

If we select the future value key (FV) on the financial calculator, we will know that the
amount left in the account $372,864 will grow to a value of $1,058,718.
In order for Andrew to have $1.5 million, he will need to accumulate a further
$441,282.
Step Three - If Andrew is to accumulate the extra $441,282 in the years between age
55 and age 65 years, he will need to deposit the following regular amounts (annuity)
into his retirement account.
We know:
FV

= amount of the future sum of money ($441,282)

= interest rate per period (11%)

= number of periods (10)

If we select the payment key (PMT) on the financial calculator, we will know that if
Andrew deposits a regular payment (annuity) of $26,389 for each of the ten years after
his 55th birthday, he will achieve his goal of having $1.5 million in his retirement
account at age 65 years.

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Professional Advice: Will I Have Sufficient Funds?

Geoff and Julie have three young triplets, Robyn, Brett and Madeline. Today is 31st
December, the childrens third birthday. Geoff and Julie are discussing their plans to
provide for their childrens education. They estimate that school education will cost in
the vicinity of $8,000 per year (in todays dollars) for each child during the six years of
secondary education. School fees are payable in advance. The children will start
secondary school in the January after they have had their 12th birthday, i.e. secondary
school commences after 9 years (start of the 10th year).
Geoff and Julie have a combined gross income of $120,000 and this is likely to increase
each year only with inflation. They have a 25-year mortgage and a car loan for
$12,000. After living expenses, tax, mortgage and car repayments, Geoff and Julie have
a surplus of about $10,500 each year. To date, they have not really saved any of this as
most of the surplus has gone towards paying off a business debt. Fortunately this debt
has been extinguished. Geoff and Julie seek your advice as to how much they will need
to have accumulated by the time the children commence their secondary schooling.
They also wish to know how much they will need to save each year over the next 9
years in order to have sufficient funds available for their childrens schooling. They
have considered investing their savings in a cash management trust because they feel
that a cash management trust will provide them with a safe investment.
Required:
1.

What will you need to know in order to address the questions raised by Geoff and
Julie?

2.

Advise them as to the likelihood of them having sufficient funds available for the
childrens school education and calculate how much they will need to invest each
year. Be sure to identify any assumptions that you use in making your
recommendations and address their concerns about the safety of their proposed
investment strategy.

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Suggested Solution:
1.

A financial planner would need to ascertain Geoff and Julies attitude to different
types of investments, their risk tolerance and the likelihood that the savings of
$10,500 per year is going to be stable. It would also be important to determine if
there were likely to be any large financial outlays over the foreseeable future
which might impact their ability to save.

2.

The financial planner might wish to provide a comparison of savings requirements

under two scenarios - savings to be invested at 4.5% in a cash management trust,
and savings invested at say 8% through a managed investment.

One way to think about the issues facing Geoff and Julie is to consider a time line as a
means of clarifying when the cash inflows and cash outflows are expected to occur.
The Table below shows how much would need to be saved each year if the savings
period was the next 9 years, and the rates of return were 4.5% p.a. and 8% p.a.
The cash flows were determined as follows:
School costs:
Determine how much the school costs will be at the time the children commence
secondary school. This is assumed to be when they have turned 12 years of age, at the
start of the 10th year.
When we use either a financial calculator or the present value formula, we assume the
cash flows occur at the end of the year. In this example, Geoff and Julie are required
to pay the school fees in advance so we can think of a payment at the start of year 10
as being the same as a payment at the end of year 9. The payment at the start of year
11 is the same as a payment at the end of year 10 etc. In the last year of secondary
school there is no payment as the last of the 6 school payments would be made at the
start of year 15 (which is the same as the end of year 14).
To determine how much the school costs will be at the start of year 10 (end of year 9)
assuming a rate of return on invested funds of 4.5%, we can input the following into a
financial calculator:

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Step 1: Calculate the present value of the 5 regular amounts to be paid at the end of
years 10, 11, 12, 13 and 14. (we do not need to find the present value of the payment
at the end of year 9 because it will be worth exactly $24,000 as there is no time gap
and hence no reduction in value)

PMT

= amount of the annuity ($24,000)

= interest rate per period (4.5%)

= number of periods (5)

If we select the present value key (PV) on the financial calculator, we will know that if
our opportunity cost (rate of return on invested funds) is 4.5%, $24,000 to be paid at
the end of years 10, 11, 12, 13, and 14 is equivalent to paying $105,359 at the end of
year 9 (this is the same as saying the start of year 10)
Step 2: Add the $24,000 to be paid at the end of year 9 to the answer from Step 1.

$105,359 + $24,000 = $129.359

The actual school fees that will be paid are 8 x $24,000 = $192,000 but because these
fees are paid over a 6 year period, the time value of money means this is equivalent to
paying a lump sum (present value) of $129,359 at the end of year 9 (start of year 10).

Find the regular annuity amount to be deposited each year commencing at the end of
year 1 for a 9 year period that is equivalent to an amount of $129,359 at the end of
year 9. To do this, input the following values in your financial calculator:

FV

= amount of the future sum of money ($129,359)

= interest rate per period (4.5%)

= number of periods (9)

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If we select the payment key (PMT) on the financial calculator, we will know that if
Geoff and Julie deposit a regular payment of $11,975.34 each year for 9 years, they
will have $129,359 at the end of the 9th year, enough for the childrens secondary
schooling costs.
The problem with this is that Geoff and Julie can only manage to deposit a maximum
of $10,500 each year. Making regular payments over the same time period if the rate
of return is 8% p.a. will enable them to meet the schooling costs and remain within
their budget.

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End of
year

Age of
triplets

School
costs

Present Value of
school costs at
start of
secondary
school

Amount to be
saved over next
9 yrs to provide
sufficient funds

Amount to be
saved over next
9 yrs to provide
sufficient funds

if rate of return
is 4.5%

if rate of return
is 8%

3 yrs

4 yrs

$11,975.34

$10,359.03

5 yrs

$11,975.34

$10,359.03

6 yrs

$11,975.34

$10,359.03

7 yrs

$11,975.34

$10,359.03

8 yrs

$11,975.34

$10,359.03

9 yrs

$11,975.34

$10,359.03

10 yrs

$11,975.34

$10,359.03

11 yrs

$11,975.34

$10,359.03

12 yrs

- $24,000

$11,975.34

$10,359.03

10

13 yrs

- $24,000

11

14 yrs

- $24,000

12

15 yrs

- $24,000

13

16 yrs

- $24,000

14

17 yrs

- $24,000

15

18 yrs

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$129,359

Assumptions:
a)

Cost of schooling remains constant in real terms

b) The interest rates used in this example are after taking into account

inflation
c)

Geoff and Julie are able to save regular amounts each year

d) There are no foreseeable large purchases to be made

What we can see is that if Geoff and Julie want to ensure that they have sufficient
funds saved by the time the children commence secondary school, an investment in a
cash management trust will not provide a sufficient return to enable them to do so.
Geoff and Julie could achieve their savings over the next 9 years, if they invest their
savings in an investment that is generating an 8% return.
It would be necessary to explain to Geoff and Julie that a cash management trust
might not be the most appropriate investment vehicle as it is more suitable for those
investors who require access to their funds and/or are investing for a relatively short
term. The investment they are considering is a long term investment and as such, it
would be worthwhile considering saving via an investment that has a growth
component. This should provide them with a return that is likely to compensate for
increases in inflation and provide them with a better overall return because of the
impact of compounding. Various investment alternatives could be suggested.

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Try this case study for yourself.

Case Study
Kane and Justine are considering whether or not to buy a particular property valued at
$680,000. They have $200,000 of their own funds to commit towards the purchase
and they expect to incur an additional $50,000 in fees and taxes on the purchase itself.
They are able to borrow at an interest rate of 7.20 per cent per annum with interest
compounded monthly. Loan repayments would be monthly with the first payment due
at the end of the first month after purchasing the property. The term of the home loan
is 30 years. They both work full-time earning a combined after-tax salary of $11,000
per month.
A loan affordability ratio is equal to the monthly home loan repayment divided by a
couples household after-tax monthly income. A key threshold for mortgage stress is
when the loan affordability ratio reaches 35%.
a) Assess whether this couple will face mortgage stress at current interest rates.
Hint: because the interest is compounded monthly, we need to use the number of
months for the mortgage loan, not the number of years in determining the regular
payments to be made. We also need to use the monthly interest rate (7.2% /12 =
0.6%)
After 1 year, the bank informs Kane and Justine that $524,821 is still owing on your
loan.
b) How much in total have Kane and Justine paid in mortgage payments during
the first year?
c) Of the repayments, how much of the principal has been reduced?
d) How much interest have you paid in year 1?
e) If the bank now increases interest rates from 7.20 per cent to 8.40 per cent,
how does this affect Kane and Justines repayments and their loan affordability
ratio?

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Hint: remember to use monthly interest rates. And, remember that there are only 29
years left on the loan (use months not years).

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Answer to case study:

a) The regular monthly payment to be made is $3,597.58
If repayments are $3,597.58 each month, this represents ($3,597.58/$11,000)
= 32.7%
The repayments do not exceed 35% so Kane and Justine would not be considered to
be experiencing mortgage stress although they are getting close should interest rates
rise or their income fall.
b) They have paid in total $43,170.96 (12 x $3,597.58)
c) Given the amount still owing at the end of year 1 is $524,821,they have only
reduced the principal by $5,179 ($530,000 - $524,821)
d) They paid a total of $43,170.96 in mortgage payments and the principal has
only been reduced by $5,179 so the difference is the interest paid to the bank
$37,991.96

e) If interest rates increase to 8.4% per annum, the regular monthly payment
would now be $4,029.36

If repayments are $4,029.36 each month, this represents ($4,029.36/$11,000) = 36.6%

The repayments now exceed 35% so Kane and Justine would be considered to be in
the category described as those experiencing mortgage stress.

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Advanced Case Study

Financial Planners use financial mathematics in both simple and more complicated ways to conduct
client scenario-based analysis.
While scenario-based analysis is commonly now performed via specific financial planning software,
the software is still performing financial mathematics. And like any program, it is important not to
blindly trust an answer, but to actually understand the building blocks of the software that produces
the answer. That process starts with understanding financial maths.
Lets have a look at a typical (but complex) client scenario that financial planners are often asked to
provide advice on by a client, on a regular basis.
A typical client concern am I on track to reach my retirement goals?
Clients often want to know whether they are on track to be able to retire. In order to be able to
provide that answer for a client, you will need to ask the right questions. The majority of these
questions nevertheless are contained within the Client Questionnaire. You will recall we covered the
Client Questionnaire in Module 1 of the Diploma of Financial Planning for your reference.
Step 1
You need to understand how much money the client needs to live on once they decide to retire.
Make sure you tell them to give you the amount in todays dollars. It should also be calculated
annually. This is subjective of course. Some people will think $50,000 is too much, while others will
decide $100,000 is too little.
A few points to remember in helping clients determine this amount are to recommend they
complete a budget if they are unsure about their current or future spending. You will recall we
addressed budgeting in Module 1 of the Diploma of Financial Planning.
Lets say for the purposes of this case study that your client says they need to live on $60,000 in
todays dollars in retirement. Assume this amount is net of tax. Once you study superannuation and
retirement in detail in module 3, it will be clear most income can be derived either tax free or very
tax effectively in retirement using the right superannuation strategy.
Step 2
You then need to ask your client when they want to retire. You need a specific time frame - for
example in 8 years time. The question is asked because you need to determine the lump sum they
will require in the year they wish to retire. This lump sum is required to provide the retirement
income over your clients lifetime.
Lets say for the purposes of this case study your client tells you they want to retire in 8 years time.
Step 3
You are now in a position to start calculating the clients future needs. There are several calculations
you need to undertake. In addition, you need to clarify a few more questions with your client as you
progress throughout this step.

Given you have been told your client requires $60,000 in todays dollars, you need to determine
what $60,000 is equivalent to in 8 years time. This is a future value of a lump sum calculation. You
should apply a rate of inflation to grow this amount by 8 years (say 3.5%). Hence you have
PV=$60,000, n=8 and r=.035 and you are solving for FV. The answer is $79,009
The next part of this process is to assume you are now at a time period that is 8 years from today
your clients retirement date has arrived! You now know your client requires $79,009 each year from
retirement indexed with inflation so their purchasing power is maintained. As you know this is
equivalent to $60,000 in todays dollars. You now need to calculate the present value lump sum
required to produce $79,009 each year over your clients lifetime. This is a present value of an
annuity calculation.
Before commencing the calculation a few additional questions need to be asked of your client. You
need their life expectancy to work out the period they need their money. This is the n (i.e. period
of time) in the present value of an annuity formula. You can refer to life expectancy tables to do this
(noting women have a higher life expectancy than men). The problem of course is these tables are
merely averages. Obviously, you and your client would want a margin for error (hoping of course
your client lives beyond their expectancy). So we always add around 10 years to a life expectancy
to be conservative. You also need to ask your client if you want the lump sum you are determining
they will need in 8 years time to be completely exhausted by the time they die, or whether they
want an inheritance available for their nominated beneficiaries. That will determine whether you put
zero into the future value (FV) section of the formula or an amount equal to the inheritance they
have nominated.
Lets assume for the purposes of this exercise you have chosen a life expectancy of 32 years and you
have also put aside an amount of $250,000 after 32 years from retirement to act either as an
inheritance or a safety net should the client live beyond that.
Ok, to summarise, you now have the ongoing payment (PMT) determined which is $79,009
commencing in 8 years time from today. You have the period (n) being 32 years from retirement,
and you have the future value (FV) being $250,000 in 32 years from retirement or 40 years from
today. You now need to solve for the present value (PV) of the annuity in 8 years time (i.e.
retirement date), BUT you need to determine one last thing. You need to determine the return (r)
you will use in the formula. That is, what average return would be required to produce a lump sum
to pay $70,009 indexed with inflation at retirement over 32 years leaving an inheritance of
$250,000? You should speak to the client and discuss the return you will be including in the formula.
It should be consistent with the returns you have indicated the client should expect over time, based
on their completed risk profile questionnaire. You can refer to what a risk profile is in Module 1 of
the Diploma of Financial Planning.
Lets assume you indicate to the client (based on their risk profile and the fact their money will be to
fund their retirement) that an average gross annual nominal return of 7% is realistic over time. You
now need to adjust this nominal return to take into account an estimated inflation rate to allow the
$79,009 over 35 years to maintain its purchasing power. Assuming you use an inflation rate of 3.5%,
we can roughly say the real return (r) (after inflation) is approx. 3.5% which is our last variable

required to calculate the lump sum required at retirement to produce the income your client
requires. Using these inputs, the Present Value (PV) = $1,589,759
Step 4
You now know your client requires $1,589,759 at retirement to meet their objectives to live on
$60,000 in todays dollars in retirement. Given your client wants to retire in 8 years time, this step
allows you to determine the lump sum required today to reach your clients goal. In other words is
your client on track or is there a deficit and what might you be able to do to plug the gap in the
intervening 8 years.
This a present value of a lump sum question. You now have the future value (FV) being $1,589,759
and the period (n) being 8 years. You can also use a return rate that is consistent with the risk
profile your client is prepared undertake with respect to their existing investments over the next 8
years. Lets assume its 7%.
The present value required by your client to reach their lump sum they require in 8 years to achieve
their retirement goals is $925,254
Conclusion
If your client has an amount greater than $925,254 today, they are on track to reaching their
retirement aimsfantastic! If they have a deficit, then they might need to save money over the next
8 years or reduce their expectations about the income they can comfortably live on, or a
combination. Additional calculations can be conducted to analyse those possibilities which is beyond
the scope of your course. Again, financial planning software provides all these modelling scenarios in
a user friendly format, but knowing how scenarios are derived is very important. Well done if you
understood everything!

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APPENDIX 5 TIPS FOR USING EXCEL SPREADSHEETS

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I.

Overview of t he Excel Work Space

Titles, Windows, and Worksheets

The title bar at the very top of your Excel screen reminds you that you're in Excel. If
your workbook is expanded to take up the maximum amount of screen space, its title
bar is merged with Excel's title bar to look like this: Microsoft Excel - Book1. If your
workbook is taking up less than the maximum amount of screen space it's displayed in
its own window with its own separate title: Book1.
Book1 is the default name for an Excel workbook until you assign it another name.
Book1 is composed of multiple worksheets. Take a look at the bottom of the Book1
window to see the tabs labeled Sheet1, Sheet2, Sheet3, etc. Use the mouse to click any
one of these tabs to move that worksheet to the top of the display.

Right-click any tab to get a pop-up menu of options specific to the tab. For example,
one of the options is Rename . Click the Rename option to put the selected tabs
name in reverse video. Type a different name and hit the enter key to change the tabs
name.

Change the order of worksheets by dragging and dropping a tab from one location to
another. Delete a tab by clicking the tab to select it, right clicking, and selecting
Delete from the pop-up menu that displays.

Tip
Move or copy a worksheet with the
commands Edit, Move or Copy Sheet.
Indicate what workbook you want
the sheet to be in.
Click the Create a copy box at the
bottom of the dialog if you want to

Menus
Excel's menu appears across the top of the workspace. The menu is a part of Excel's
workspace and is separate from the workbook in which you create worksheets, charts,
and other objects.
The menus are arranged to lead you to the option you need. Select any top-level menu
entry by clicking it with the mouse or holding down the ALT key and tapping the
underlined letter for your choice. Excel displays a further set of options using a dropdown menu list. Selections with a diamond to the right of them lead to other dropdown lists. Menu selections with ellipses after them lead to a dialog box that collects
information Excel needs to carry out your command.
There are times when the menu contents may change. For example, if you're working
with a chart the menus reflect choices relevant to the InfoWindow or the charting
environment.
Choose the commands View, Toolbars,
Customize to open the Customize dialog.
Choose the Options tab. On that tab you
can control whether Excel positions the
Standard and Formatting toolbars together
as well as whether Excel uses its most
recently used option for menu items. If
you like seeing the menu items in the same
place each time you open a menu, toggle
off this option.
3

 Formula Bar
The formula bar appears under the menus and any toolbars you might have open at
the top of the screen. It reflects the contents of whatever cell is the current cell in the
worksheet. The left of the formula bar shows the cell reference or the cell name if the
cell has been assigned a name. At right is a display of the cell's contents. If your cell
contains a formula, the worksheet cell shows the value of the evaluated formula while
the formula bar displays the formulas contents (E.g., the formula itself).

Toolbars
Excel has more than a dozen preconfigured toolbars. The button icons on a toolbar are
generally shortcuts to commands you might otherwise issue using the menus or with
keystrokes. Toolbars appear as strips or boxes of icons located around the edge of your
worksheet or floating on its surface.
When you start Excel you see the Standard toolbar, with icons for frequently-used
tasks such as file open, print, copy and paste, formatting, functions, charting, etc. To
display more toolbars, use the commands View, Toolbars and select the toolbars you
want displayed from the dialog box that appears. Turn off toolbars the same way.
Toolbar Display Shortcut
If you have at least one toolbar displayed, heres a shortcut to
displaying and hiding toolbars: Right-click anywhere in the gray
toolbar area at the top of the Excel window (but not directly on a tool
button). Excel displays a drop-down list of almost all its toolbars.
Click any toolbar name in this list to display it (if hidden) or to hide it
(if displayed).
5

Move the mouse pointer to the top edge of an icon on a toolbar to have Excel display a
tooltip , or a short description of what that icon does.
Grab a toolbar by holding the left-hand mouse button on a space on the toolbar but
not directly on a tool button. Drag to any location in the workspace where you want
the toolbar to be.

Reshape any toolbar by dragging with the

mouse on an end or side. For example, you
may prefer to have all the tools in a toolbar
in a box, like the one at left.

Status Bar
At the very bottom of the Excel workspace is the status bar. Keep an eye on the status
bar for information about the status of your session or a particular operation. For
example, if you have the num lock key on and the caps lock key on, Excel displays the
words NUM and CAPS in the status bar.
The status bar is also useful for getting on-the-fly calculations about spreadsheet
values. In the example below, highlighting the range of numbers in column A displays
their sum (the default) in the status bar.

Right-click the Sum report in the status bar to change the status bar calculation to
one of the other options: Average, Count, Count Nums, Max, or Min.

Worksheet Referencing Scheme

The worksheet part of the screen is arranged as a grid of rows and columns. An
individual cell in the grid is named by the intersection of the numbered rows and
lettered columns. For example, starting at the upper left-hand corner (the worksheet
home position) a cell two columns over and four columns down is named cell B4.
If you prefer, you can turn on an alternative R1C1 style of referencing where both
rows and columns are numbered. To do this, select Tools, Options, General and select
the R1C1 reference style under Settings . If you make this selection, both rows and
columns have numbers as names. For example, with this scheme, the name for cell A5
becomes R5C1. The R1C1 referencing style is used mostly in macro writing.

For More Information

Click Help on the top-level menu and choose Microsoft Excel
Help to display either the Office Assistant or Excels online
help guide (depending on your Excel configuration).
If using the Office Assistant, enter workbooks and
worksheets as the help topic.

If using the online help guide, choose the Contents tab and select the item Working
with Workbooks and Worksheets.

II.

Basic Dat a Ent ry

Entering Text and Numbers

Click with the mouse on the cell in which you want to enter data to make that cell the
current cell. Begin typing the entry for that cell. When your entry is complete, hit the
enter key.
Excel automatically left justifies text and right justifies numbers, but you can easily
override these defaults with formatting commands.
Notice that while you're typing an entry into a cell, the entry also displays in the
formula bar. Any time you make that cell the current cell, the cell's contents display in
the formula bar. If you enter a formula in the cell, the formula itself displays in the
formula bar while the evaluated result of the formula displays in the worksheet.

Editing an Entry

To edit the contents of a cell double-click the cell with the mouse. Excel changes the
mouse pointer to a vertical edit bar within the cell. Change the cell contents and then
hit the enter key to exit cell edit mode.
Alternatively, make the cell you want to edit the current cell. Then click the mouse in
the formula bar and perform the edit operation in the formula bar instead of in the cell
itself.
If your copy of Excel is configured differently and you want to change edit modes,
choose Tools, Options to open the Options dialog and then select the Edit tab.

Deleting an Entry
Make the cell whose entry you want to delete the current cell. Then hit the Delete key
to delete the cell's contents.
Delete the contents of a range in the same way youd delete the contents of a single
cell.
9

 Adding or Deleting a Row or Column

Its easy to make changes to your spreadsheet layout by adding or deleting rows or
columns. For example, to add a single column, click the header of the column to the
right of where you want the new column to be located. The entire selected column
will appear in reverse video. Select Insert, Columns from the main menus and Excel
adds a new column to your worksheet. To insert more than one column at a time
select more than one column header before choosing the menu instructions. Inserting
an additional row or rows works the same way. Select the row or rows below where
you want the new row to be located.
Delete a row or column by selecting its header and clicking Edit, Delete or hitting the
Delete key.

I I I . Select ion
Selecting More Than One (Contiguous) Cell
You might want to select a range of cells to perform the same operation on all of them
with a single command. To do this, click a cell at one corner of the range of cells you
want to select. Make sure the mouse pointer is a wide crosshair shape (not an arrow).
Then hold down the left mouse button and move the mouse over the worksheet to
include the cells you want selected. Reverse-highlighting indicates which cells are
selected. The cell you started out with is the only one that doesn't appear in reverse

10

highlighting.
Tip
To select a very large range, one thats not conveniently visible all at
once on the screen, heres an easier way than dragging with the
mouse From the menus select Edit, Go to. In the dialog box that
displays enter the address of the range you want to select in the
Reference box. For example, A1:Q109. Click OK and Excel selects

11

 Selecting Non-contiguous Cells

Excel makes it easy to select noncontiguous cells. Select the first cell or range of cells
you want to include. Then hold down the CTRL key and move the mouse pointer to
select a noncontiguous cell or range. Repeat as many times as necessary, holding
down the CTRL key the entire time, to select all the cells/ ranges you want.
You can also use the same Edit, Go to option described in the tip above. In this case,
enter in the Reference box the addresses of all the ranges and cells you want to
select, separated by commas. For example:

Tip: Click the Special button on the Go To dialog to select particular classes of
cells or objects.

12

I V.

Key Mouse Operat ions

Move a Cell or Range

Select the cell or range you want to move. When selected, it should appear in reverse
video. Position the mouse pointer at the edge of the cell or range so it turns into an
arrow. Hold down the left-hand mouse button and drag the selection to its new
location. Release the mouse button. The cell or range is still selected. Click anywhere
out of the cell or range to de-select it.

Copy Data
Similar to moving a cell or range. Select the cell or range you want to copy. Position
the mouse pointer at the edge of the cell or range so it turns into an arrow. Hold down
the CTRL key and hold down the left-hand mouse button. (Note the small plus sign
displays above the mouse arrow pointer as a visual reminder that this is a copy
operation, not just a move.) Drag the selection to create a copy in a new location.
Release the mouse button. Then click anywhere out of the cell or range to de-select it.

Fill & Extend

This section describes two variations on copying: Filling and Extending. Both methods
start with a source cell or range to copy and copy to contiguous cells.
Filling repeats cell contents. The results are most like the copy operation. To copy by
filling:
1. - Select the source cell or range to
copy.
2. - Position the mouse pointer on
the fill box in the lower-right-hand
corner of the cell or range. The
The fill box

13

pointer should turn into a thin filled crosshair.

3. - Hold down the left-hand mouse button and drag to the right so the range
now extends to the next column (or columns).

14

4. - The contents of the source cell or range are repeated in the adjacent
location you indicated.
5. - Click any cell to deselect and turn off reverse video.
In this example, the fill box at the lower right corner of cell A3 was
dragged two columns to the right to extend the A3 entry.

Extending is similar to filling. It also starts with the source data but instead of copying
it extends the data in a logical progression. That is:
1. - Select the source cell or range to extend.
2. - Position the mouse pointer on the fill box in the lower-right-hand corner of
the cell or range. When positioned over the fill box the pointer will
display as a thin filled crosshair.
3. - Hold down the left-hand mouse button and drag to the right1 so the range
now extends to the next column (or columns).
The difference between filling and extending is that after you extend the source cell or
range the cells youve filled with data don't hold the same thing as the source cells.
Theyre not just a copy because Excel extends the data in a logical fashion.
For example:
If the source cell(s) hold(s):

The contiguous extended cells hold:

Qtr1

Qtr2, Qtr3, Qtr4, Qtr1, Qtr2, etc.

Jan

Feb, Mar, Apr, May, Jun, Jul, etc.

You can also drag to the left or down, depending on what your source data looks like and what you want
to do.

15

1994, 1995

1996, 1997, 1998, 1999, 2000 etc.

In the third example in the table above we needed to give Excel at least two cells
worth of source data so it would know how to extend the data. A variety of
progressions are possible if you give Excel a sample of how you want it to proceed. For
example:
If the source cells hold:

The contiguous extended cells hold:

2000, 1999

1998, 1997, 1996, 1995, 1994, etc.

.2, .4

V.

.6, .8, 1.0, 1.2, 1.4, 1.6, etc.

Moving and Select ing

Moving Around the Worksheet

Use the scroll bars at the right and bottom of the workbook window to move quickly
around the worksheet.
To go to a specific cell, hit the F5 key to get the Go To dialog box. In the Reference area,
enter the reference of the cell you want to go to and click OK. Excel closes the dialog
box and makes the cell you named the current cell.
In the Go To: area of the dialog box, Excel keeps track of the last locations you asked
for, in case you want to return to them.
If you've named cells or ranges in your worksheet you can enter a name instead of a
cell or range reference.
CTRL+Home puts you in the upper-left-hand corner of your worksheet: cell A1.

Specifying a Range
You may need to specify a range by typing, and not just by selecting the range with
the mouse. This is especially useful, for example, if the range is a large one extending
16

past the borders of your display and so not easy to select by dragging. To specify a
range by typing, indicate the cell reference of the cell at the top left corner of the
range. Type a colon. Then indicate the cell at the bottom right corner of the range.
Heres an example of typing in a range specification: A1:B5
You can also select a range by using the Go To dialog box (F5) and typing in a range
specification instead of just a single cell reference.

Selecting a Range for Data Entry

If you need to enter a lot of data in contiguous cells of your worksheet you can speed
up operations by selecting the range where the data will be before you begin entering
data. Then when you enter data in the first cell of the range you can just hit the enter
key to move to the next cell instead of hitting the enter key and having to use an arrow
key or the mouse to move to the next cell. Within the range you specify, Excel by
default moves down each column and then across.
Change the default setting for your installation of Excel by clicking Tools, Options, Edit
and selecting an option from Move Selection after Enter Direction .

17

VI .

Form ulas

Format
Select the cell where you want to enter a formula and type an equal sign to start the
formula (and activate the formula bar). Type the formula into the cell and hit the enter
key when you're finished. Use parentheses where necessary to make operations clear.

The formula bar

How the formula

displays in the
worksheet itself.

Naming Cells & Ranges

You can assign any worksheet cell or range a name and then use that name in a
formula. This can make your worksheet more readable.
An easy way to assign a name is to select a cell or range and enter the name you want
to assign it in Excels name box on the formula bar.

The name box

on the formula
bar.

18

If you name cells or ranges after youve already used their values in formulas, you
need to explicitly tell Excel to use the names in the formulas. You can do this with the
command Insert, Name, Apply. Select the names you want to use from the Apply
Names dialog box that displays.

Tips for Avoiding Errors

Naming key cells and using those names in formulas instead of cell references can help
you avoid errors. For example, the formula =Q55*M92 is probably less immediately
comprehensible than the formula =Subtotal*Taxrate.
When constructing a formula you can use the mouse to click a cell you want to
include in the formula instead of typing in the cells name or reference. Excel includes
the cell reference (or name, if available) in the formula automatically. Clicking the cell
you want to include can help you avoid typing in the wrong reference by mistake.
Keep formulas short and straightforward. If you need to express a complex
relationship with a formula it's better to build several short formulas and use them as
building blocks for intermediate values rather than to build one long, baroque, errorprone, and hard-to-debug formula.
19

Excel displays an error value in a cell when the formula for that cell can't be
calculated. If a formula includes a reference to a cell that contains an error value, that
formula also produces an error value.

20

Examples of Excel error values:

#DIV/0!
#N/A
#NAME?
#NUM!
#REF!
#VALUE!

The formula is trying to divide by zero.

No value is available.
Excel doesn't recognize a name used in the formula.
There's a problem with a number in the formula.
The formula refers to an invalid cell.
An argument or operand is incorrect.

Using Built-in Functions

Excel has a large library of built-in functions you can use to perform standard
worksheet calculations. In many cases you can use these functions instead of writing
your own formulas. Use the built-in functions by themselves or embed them within
your own formulas.
Functions can be nested within other functions.
All Excel functions have the same basic syntax: =function name(parameters).
If you don't already know the syntax of the function you need, use the
function button on the Standard toolbar to call up the Function Wizard
dialog box.
The Function Wizard dialog box walks you through selecting and completing a
function.

21

 Copying Formulas (Relative Referencing)

There will be many occasions when you build a worksheet model with several like
formulas. For example, perhaps your budget model totals sales in six departments for
each of the months of January to December. The formula to sum departmental sales
for January is the same as the formula to sum departmental sales for December, except
they refer to different columns of data. If your January to December columns are
structured alike, there's no reason to separately enter twelve summing formulas.
Instead, enter the formula for January and then copy it across the worksheet to the
other eleven columns.
Excel adjusts cell references in each copied formula across the row so that each
formula refers to its own column's data. That is, if the January sales data is in Column
A, the formula for January refers only to cells in Column A. Februarys data is in
Column B. Even though the sum formula for February was copied from Januarys
formula in Column A, the February formula correctly refers only to cells in Column B.
This formula copying and adjusting arrangement is the default in Excel. Its termed
relative referencing. Keep in mind that its an issue only when youre copying a
formula.

Absolute Addressing

22

There may be times when you copy a formula that you don't want Excel to adjust a
cell reference in the copy from the master formula. That is, when you copy the
formula, you don't want the default of relative addressing for some or all of the copied
formula's cell references.
For any reference in the source formula that you want to fix (e.g., disallow any
changes during the copy) use a dollar sign before the row and column indicator. The
dollar sign is an arbitrary symbol that just instructs Excel not to change the reference.
For example, a source formula that allows the D5 reference to change but fixes the
reference to A1 would look like this:
=D5*$A$1
If we copy the source formula above across the worksheet to columns E, F, and G, the
copied formulas in those columns would look like this:
=E5*$A$1
=F5*$A$1
=G5*$A$1
In this example, the formulas in E2, F2, and G2 were copied from the original formula
in D2. In the master formula in Cell D2, the reference to cell A1 was absolute (fixed)
but the reference to the value in Row 1 (D1) was relative.

As a result, when this formula was copied to E2, F2, and G2, each copied formula
referred to Cell A1 (the absolute reference value) and also to the value in Row 1 of its
own column (the relative reference value).

VI I . Chart ing
23

 Chart Basics
Some worksheet data is too complex to interpret at a glance. If this is true of your
data, and if you want to present the data in a different way, consider using an Excel
chart to show your data graphically. Excel has a variety of chart types to choose from,
from simple, general column, bar, and pie chart types to specialized types such as XY,
radar, bubble, stock, and surface charts. Excels online help for charts provides
excellent suggestions on what chart types are especially appropriate to display
particular data.

Using the Chart Wizard

The easiest way to create an Excel chart is to
make use of Excels Chart Wizard. The Chart
Wizard is a button on Excels Standard Toolbar,
or invoke it with the menu commands Insert,
Chart.
Although not required, its customary to select
the data you want to chart before you open the
Chart Wizard. At least initially, all the data you
plan to chart must be located on the same
worksheet, although it need not be contiguous.
The illustration at right shows the first of the four Wizard steps. Select the type of
chart you want in this step.

The second Wizard step shows a thumbnail

view of your chart and confirms the range of
data youre charting. If you selected the data to
chart before starting the Chart Wizard, the
Data range box is automatically completed.
Otherwise, choose the data range to chart in
this step.
Also in this step you can choose to identify
your data series in rows or in columns. Excel
makes its best guess.
24

The Series tab in Step 2 provides advanced methods for choosing and labeling data.

The third Chart Wizard step

provides lots of options for
formatting your chart. Most of
these options can be accessed and
changed later, once your chart is
built, by right-clicking and
choosing from the pop-up menu
that displays.

The final Wizard step lets you

choose a location: a new
worksheet that Excel inserts into
your workbook for you, or as a
graphical object that floats on the
surface of the current worksheet.

Once youve gone through the four Chart Wizard steps, you may want to move and
or size the chart. Click the chart to select it. Drag to move it. Drag the selection box at
a corner to resize it.
As mentioned earlier, remember that right-clicking any chart element provides
access to customization options for that element. In addition, the Charting
Toolbar that displays whenever a chart is selected also contains many of the
most commonly-used commands.

25

An Excel chart is dynamic, in the sense that its tied to the data on which its
based. If the underlying data values change, the chart changes automatically.

VI I I . File Managem ent Essent ials

Saving a File
To save a workbook use the commands File, Save to get the dialog box that lets you
name your file and specify what drive and in what folder it should be saved.

The Save as type: entry at the bottom of the dialog box lets you translate your file into
other formats (123, text, DBase, etc.)

Retrieving a File

26

To retrieve a workbook you've saved on disk use the commands File, Open. Excel
displays a dialog box similar to the one above where you can name the file to open
and specify where its located.

I X.

Print ing
To print the current worksheet using Excel's defaults for printing click the Print button
on Excel's Standard toolbar.
To control Excels print options select File, Page Setup to open the Page Setup dialog
box. Note that this dialog has four tabs: Page, Margins, Header/Footer, and Sheet.

27

Some particularly useful options:

To specify an area to print
Go to the Sheet tab, click in the Print Area box and then drag through the worksheet
areas that you want to print. (Nonadjacent ranges print on separate sheets.)
To print row & column headings & gridlines
Go to the Sheet tab and click in the row and column headings and gridlines boxes
to put check marks in these boxes.
To print headers and footers
Click the Header/Footer tab and follow the prompts. Note that a number of standard
header entries (page, name, date, etc.) are provided.
To center the printout on the page
Click the Margins tab and check Center on page horizontally or Center on page vertically.
To select portrait or landscape orientation
Click the Page tab and select whether you want Excel to print down an 8 x 11 page
or across.
To fit your printout on one (or x) page(s)
Click the Page tab and click the Fit to option in the Scaling section. If you have a
spreadsheet thats just a row or column or two too large to fit nicely on a single page,
this is a lifesaver of an option. It reduces your entire spreadsheet in size just enough to
fit in the space you specify with the Fit to option.

28

APPENDIX 6 THE FAIRY GODMOTHER AND THE MAGIC

TRAIN NOEL WHITTAKER

Document: Module 2: Investments Planning

Identifier: DFP 1203

The Fairy Godmother and the Magic Train

Wishes, on their way to coming true, will not be rushed.
ARNOLD LOBEL
It was a warm summers night and Margaret was propped up in a hospital bed, half asleep, musing
over the events of the day. It had been the biggest day in her short life of 22 years. That morning her
first child James had been born and she had that tired but contented feeling of a new mother as she
rested and thought about what kind of world James would face.
Suddenly she was startled by a glow in the room and looked up in fright to see a small figure,
dressed like a ballerina, coming in through the closed window. The window did not seem to impede
the strange little being who seemed to have no more substance than a beam of light.
Who are you? whispered Margaret slowly. She had never seen anything like it before but did not
feel frightened as the tiny body seemed so full of love, as well as being too small and light to harm
anybody. I am the fairy godmother of all the babies, was the reply. I visit every new parent to tell
them about my magic train and how it can carry their child on a trip to riches beyond all
imagination.
Margaret was not impressed. The idea certainly sounds fine but I dont see it happening. I wonder if
I will be like most people I know; forever trying to scrape enough money together to pay for the food
and the mortgage payments. She was now fully awake, her initial shock had disappeared and
curiosity was slowly taking its place.
I know, replied the fairy. You seldom see the results of my work because I have such an uphill
battle trying to convince people to come on the trip. I offer them all a ride on my train but so few
bother to accept the invitation. Most of them seem content for their children and their childrens
children to remain poor.
Margaret was a sensible woman and by now her curiosity was thoroughly aroused. She asked if the
trip was free.
Of course the trip is not free; everything worthwhile in life has a price, but in this case the price is
VERY small, if you join the train early enough. Why dont you let me tell you how it works? Naturally
Margaret did want to hear more and what she heard was destined to change the life of her family
for generations.
The fairy told her of a magical train that was given to every person, but made just one journey in
their lifetime. It started on this trip when the person was born and kept going until they died. It
made up to 100 stops and at every stop its tender was filled up with gold. Each time the gold filled
up the tender the train grew in size so that at the next station there was a bigger tender waiting for
the next load of gold to be poured in.
Margaret was intrigued by the cost of the trip for it had the strangest fare structure, just $1,000 a
year or $2.73 a day; furthermore, it was guaranteed never to increase provided you paid it every
year.

Thats a cheap enough price, she said. Almost everybody I know can scrape up $2.73 a day. There
must be a catch.
No, theres no catch, but there is another rule I havent told you about yet. Its a weird one really.
The $2.73 a day only pays for the running costs of the train so you still have to pay for the train itself.
However, there is a special bonus if you get on at the terminal, but only there, the train is given to
you. Remember this is a magic train, so every time the gold pours into its tender it gets bigger. We
can give you one for nothing when we start the journey because the train is so tiny that its almost
worthless. If you dont board it then you have to buy the train, as well as pay the running costs.
Therefore it costs more to travel as you get on at stations along the way and the bigger the train gets
the more it costs.
Margaret was sceptical, but was interested enough to discuss it with her husband Jack when he
came to visit next day. He was more sceptical than Margaret, but there was something about the
fairy that Margaret trusted, so after about an hour of discussion Jack said Lets give it a go. We have
$1,000 saved up so well join the train with that.
The good fairy returned the next night and Jack and Margaret handed over their $1,000. In return
they were given a tiny train about half the size of a matchbox toy. This thing will be pushing to
take James too far on the journey to riches, snorted Jack, but Margaret calmed him down and they
settled into their new life as parents.
A year later the fairy godmother came around again with some exciting news. Your train has just
pulled into the first station and they have dumped $140 in gold into its tender. Its now 14% bigger.
The train didnt look much bigger and Jack was still suspicious of the whole concept, but they had
been dutifully putting their $2.73 each day away in a jar so they quietly handed over the second
thousand dollars.
Another year passed quickly. James was now a big healthy two year old and the good fairy called
with the latest news. We have just got to Station Two and there is now $300 in gold pouring into
your trains tender. Thats more than TWICE what you got last year and your train is now worth
$2,440. Its now two and a half times bigger than when I gave it to you. She was right. The train was
growing nearly as fast as James.
Three more years went by and it was Jamess fifth birthday. They had continued putting away their
$2.73 a day and the good fairy called with some incredible news. Your train just pulled into the fifth
station and they have dumped $926 of gold into it. Thats almost as much as you are putting into
your money box. The train is now more than seven times bigger than when you bought it. It is worth
$7,537.
The once sceptical Jack was in raptures. I have been talking to my mate Henry about this. He
thought it was a stupid idea at the start but now he wants to come on the journey too. Can he have
a train for his five year old daughter?
Of course he can, laughed the fairy. Everybody can have their own train BUT remember the rules I
told you about. The train is only free if you board at the terminal. Once it leaves there and starts the
journey you have to buy the train if you intend to pay only $2.73 a day for the running costs. If Henry
wants one for his daughter he will have to pay $7,537 for it, plus the $2.73 a day naturally.

Henry was stunned when he heard this, but he wasnt a fool. He had listened at first with scorn and
then with ever increasing interest as Jack had told him about James train, and now he was prepared
to make the effort and scrape up the $7,537 he needed for his daughter to join the journey.
Five more years passed and the good fairy had become great friends with the two families. She
called to give her yearly progress report, and to look at their children who were now bright ten year
olds and watching their trains progress with interest as well as growing excitement. You are now at
Station 10. We have just tipped $2,707 of gold into your tender and your train is now worth $22,045.
It has now increased in size by 22 times since I gave it to you it is fast becoming a huge powerful
locomotive. Wasnt Henry wise to get on when he did? I doubt if any of your other friends will be
able to join it now; not many parents can find the $22,045 required to buy a train as big as this one
has become in just 10 years.
And so the years rolled by, the train grew bigger and bigger and went faster and faster and in the
year James was 21 the gold tipped into the tender was $16,195, and the train was worth $131,876.
This was also the price to buy the train then for anybody who wanted to retain the cheap fare of
$2.73 a day.
At James 21st birthday a friend of James called him aside and whispered in his ear Ive heard the
strangest things about this magic train of yours. Is it too late for me to join?
Sure you can join but the problem is buying the train. Have you got $131,876? was James reply.
Theres not a hope of that but I do have a good income. Would you ask the good fairy if there is
anything at all she can do to help me? James took pity on his friend and consulted the good fairy at
the first opportunity. He was rocked by what she told him. Certainly he can join the journey, but if
he wants a free train we shall have to incorporate the cost of it in the fare. He will have to pay just
over $20,000 a year in fares if he wants to have the same size pot of gold as you will have when you
are 60.
The mathematics of that didnt make sense to James. He had paid $21,000 in the last 20 years and
had just $39,000 still to pay. His friend would pay $20,000 a year for the next 39 years just to keep
up with him. James total fares were $60,000 while his friends would be $780,000.
By this time the train was huge but seemed to be growing at such a pace that James could hardly
believe his eyes. He had kept up the habit of giving the fairy his $2.73 a day but it now seemed so
insignificant when compared to the vast shower of gold that poured into the tender each year. By
the time he was 31 the train was worth over HALF A MILLION DOLLARS after over $62,000 had been
added to its tender. it is a strange train, he observed. More gold poured into that tender in that
31st year than went in during the whole of the first 16 years. I still cant figure out the mathematics.
On his 37th birthday he had another visit from his friend the good fairy. its time for me to
congratulate you and tell you another secret that I never told your parents. The train has just had
nearly $140,000 placed in its tender and is now worth well over ONE MILLION DOLLARS. When you
reach this level you can stop paying the $2.73 a day you now have a FREE ride for the rest of your
life!

And so the journey went on and the train continued to grow. It reached SIX MILLION DOLLARS by
James 50th birthday, TWELVE MILLION DOLLARS by his 55th birthday and nearly TWENTY FOR
MILLION DOLLARS by his 60th birthday. At that stage he stopped work and lived on all the gold he
had accumulated as a result of paying just $2.73 a day for the first 37 years of this life.
The good fairy still visits new parents but nothing has changed. Hardly anybody takes any notice of
her. What can you do with $2.73 a day? is the usual question. In reply she just smiles and thinks of
James and his special train, and in her mind sees the name that has been painted on the engine
The Magic of Compound Interest.
Important Note
The world is full of sceptics and many who read this will say the figures used are unreal, that tax will
take most of the earnings, or that the future value of the investment is made worthless by inflation.
The aim of this story is to show you the importance of starting an investment plan early, and to
understand how small sums can grow. I do NOT want it used as a tool for unscrupulous sales
people to use to encourage you to sign up for long term savings plans with huge hidden charges.
I suggest you put the $1,000 a year away in managed funds such as unit trusts run by leading fund
managers probably growth units in split trusts with all earnings re-invested will achieve the best
return. You will learn more about these in the chapters on managed funds. Make sure you keep in
touch with your financial adviser as the plan may work better if the money is invested in the name of
a low or non-income earning spouse in the early stages.
When I wrote this chapter for the original edition of More Money in 1990, I used a return on
investment of 14% and an inflation rate of 7%. Since then inflation and returns have dropped but the
principles still hold true. The new types of managed funds such as split trusts that have the ability to
maximise growth at the expense of income (a kind of internal negative gearing) should be capable of
doing better than 14% if inflation Is 7%.
At an average inflation rate of 7% a year, $24 million dollars in 60 years time is worth over $414,000
in todays money which cannot be regarded as worth little, particularly for a total investment of
$37,000. Under present laws little capital gains tax would be incurred if a progressive realisation of
the investment commenced at age 60.
The chart below illustrates the principle and is based on the figures used in the example. Obviously
future earnings can never be guaranteed, but I will guarantee that anybody who practises this
strategy over the long term will finish up with a lot of money.
Few people will make the effort to try it out yet the truth is that it DOES work and costs only $2.73 a
day. Why not give it a go?

Station
NO.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

GROWTH
140
300
482
689
926
1 195
1 502
1 853
2 252
2 707
3 226
3 818
4 493
5 261
6 138
7 137
9 276
10 714
12 354
14 083
16 195
18 602
21 347
24 476
28 042
32 108
36 743
42 027
48 051
54 918

VALUE OF
TRAIN
1 140
2 440
3 922
5 611
7 537
9 732
12 233
15 086
18 338
22 045
26 271
31 089
36 528
42 843
49 981
65 255
75 530
87 244
99 598
114 681
131 876
151 478
173 825
199 301
228 343
261 451
299 194
342 221
391 272
447 190

STATION
NO.
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60

GROWTH
62 747
71 671
81 845
93 443
106 665
121 739
138 921
158 231
180 383
205 637
234 426
267 245
304 660
347 312
395 936
451 367
514 558
586 597
668 720
762 341
869 069
990 738
1 129 442
1 287 564
1 467 823
1 672 318
1 907 528
2 174 644
2 479 094
2 826 167

VALUE OF TRAIN
510 937
583 608
666 453
760 896
868 561
991 299
1 130 221
1 288 452
1 468 385
1 674 472
1 908 898
2 176 143
2 480 804
2 828 116
3 224 052
3 675 420
4 189 979
4 776 576
5 445 296
6 207 638
7 076 707
8 067 445
9 196 887
10 484 451
11 952 274
13 625 592
15 533 174
17 707 818
20 186 912
23 013 079