1. Posts in the subject areas are now being moderated. Please do not post any details about your exam for at least 3 working days. You may not see your post appear for a day or two. See the 'Forum help' thread entitled 'Using forums during exam period' for further information. Wishing you the best of luck with your exams.
    Dismiss Notice

Market Related Methods for setting discount rate

Discussion in 'SP4' started by Rajat gupta, Oct 11, 2019.

  1. Rajat gupta

    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
     
    Rajat gupta, Oct 11, 2019
    #1
  2. Stuart Underwood

    Stuart Underwood Member

    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)
     
    Stuart Underwood, Apr 22, 2020
    #2

Share This Page