• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Market Related Methods for setting discount rate

R

Rajat gupta

Ton up Member
Hi All,

Can somebody help me in explaining different market related methods, possibly with the help of some numerical example?
Thanks in advance!

Regards,
Rajat
 
ABDR - allow for expected return on actual assets held
MTM - rate on best matching assets, where in the case the best matching assets is risk free, so bonds
BY+RP - allow for extra return on other assets - but only to the extent they could offer reasonable backing for the liabilities - eg still bonds for pensioners, but possibly equities for non-pensioners?

Example
return on bonds = 5%
return on equities = 7%
actual assets = 50% bonds, 50% equities
liability split = 60% pensioners, 40% equities

Then I'd use
MTM = 5%
ABDR = 50%* 5% + 50% * 7% = 6%
BY+RP = 60% * 5% + 40% * 7% = 5.8%
(or = 5% + 40% * (7% - 5%) = 5.8%)
The Examiners have given credit for 'sensible variations' in the past (eg September 2011)
 
You must log in or register to reply here.
Back
Top