Q&A bank 2.6: high-yielding assets

[Stephen Paines]

The question asks what measures a company that transacts all types of non-linked life business could take to reduce the capital requirements associated with new business.

One of the answers includes the line: "Invest in high-yielding assets to increase the maximum valuation rate of interest (eg move from equities to fixed interest").

Am I right in saying that yield here is being used in the sense of income, rather than return?

So is the answer relying on the fact that FI has a higher running yield (income) than equities, to compensate for the lack of capital growth?

Presumably this then increases the maximum VROI because for FI the 'yield' is the GRY, while for equities it is max (divi yield, average(divi yield, earnings yield)). So the (in general) higher running yield means the GRY for FI is higher than the divi yield/earnings yield for equities, hence we can use the higher VROI to reduce the value of the liabilities.

 

[mugono]

Hi

I'll give this one a go

Yes your logic appears correct to me! The use of the phrase 'high yielding' typically refers to below investment grade bonds (eg less than bbb).

I wouldn't get too hung up on it though - I think you have the key point (gry on bonds capture the total return whereas the dividend yield only captures a portion of the total equity return).


Hope that helps.

 

[Stephen Paines]

Thanks Mugono -- pretty much what I thought!