M
mammam87
Member
Hello
I don't quite understand the 2nd last paragraph in the Acted notes (page 10).Why is it that if market-implied inflation rates are high, the replicating portfolio is likely to hold more nominal bonds?
On page 9, para 2, I also wanted to check my understanding on why a lower discount rate is used if we include corporate bonds (compared to if we use gilts). Is it because: due to the credit risk arising from holding corporate bonds, we are faced with a higher likelihood of not having sufficient cashflows at each point in time to meet the benefit payments, and thus to be prudent, we use a lower discount rate? This differs to the asset based discount rate, where if we use a 'riskier' asset class, the discount rate is higher.
thanks!
I don't quite understand the 2nd last paragraph in the Acted notes (page 10).Why is it that if market-implied inflation rates are high, the replicating portfolio is likely to hold more nominal bonds?
On page 9, para 2, I also wanted to check my understanding on why a lower discount rate is used if we include corporate bonds (compared to if we use gilts). Is it because: due to the credit risk arising from holding corporate bonds, we are faced with a higher likelihood of not having sufficient cashflows at each point in time to meet the benefit payments, and thus to be prudent, we use a lower discount rate? This differs to the asset based discount rate, where if we use a 'riskier' asset class, the discount rate is higher.
thanks!