Hi all, If a company has moved out from equities and invest into the fixed interest securities (which will then have less expected return), will it increase the valuation rate of interest and thus decrease the value of liabilities? Or is it another way round? Hope to hear from anyone soon. Thanks in advance. =)
The effect will depend on the regulations on the country concerned, but as the returns on equities are more "risky", the valuation rate of interest allowed for liabilities backed by equities is likely to be lower than if fixed-interest securities were used. For example, in the UK, the maximum valuation rate of interest for liabilities backed by government bonds is based on the full gross redemption yield (gry) of the bonds, but if equities were used it would be the average of the dividend and earnings yield (or the dividend yield if higher), which is typically lower than the gry for bonds.
