In part (ii) the solution talks about how the GRY of bonds and the dividend/earnings yield of equities are used in the calculation of the valuation interest rate. The solution says that equities bring down the overall yield of the fund. I presume this is from GRY of Bonds being higher than the dividend yield of equities because the dividend yield does not allow for the high expected, but uncertain, capital growth in equities. I thought that the equity earnings yield; earnings per share/price, is generally higher than the GRY of bonds. So the above would not hold for earnings yield, like it does for dividend yield. Have I picked something up wrong? Thanks.
The valuation rate of interest for Solvency I is based on: - the dividend yield, if the dividend yield is more than the earnings yield - otherwise, the average of the dividend yield and the earnings yield Generally this would give a lower rate than the GRY on bonds, but in this environment, I agree it won't necessarily be the case. For example, there are more than 20 FTSE-100 stocks with dividend yields above 4% (see for example http://www.topyields.nl/Top-dividend-yields-of-FTSE100.php), whilst gilt yields only go above 3% at very long durations (see for example http://www.yieldcurve.com/marketyieldcurves.asp).
