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CP1 - Chapter 26 - PG 9

S

studyboy321

Made first post
To whom it may concern, good day

I am confused with the following statement: ‘If yields on these assets fall, the cost of purchasing annuities will rise. However, this should be offset by a rise in the value of the retirement pension fund’.

I, in general, struggle with the concept of changes interest rate values and their implications. For example, when I am reading that the yields fall, there is no worth to them, because why would I buy it if I know the yield is low, thus in my mind, the cost of purchasing should decrease, as the yields are low (not worth much). But the converse is true, the cost to purchase annuities with rise, why is this, sorry if it’s obvious, but the whole interest/yield/bond…. is confusing to me.

can you please help me

kind regards
 
Hi,

If we think back to CM1 (or CT1), then we can think about the price of a bond being the present value of all future income. In this case, as the interest rate reduces, the present value will rise. Ie if Price = 100v^10, then as i increases, the Price reduces.

I trust this helps

Thanks
Aman
ActEd Tutor
 
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