Why does it make sense to base valuation rate for liabilities on the investment assumptions for the assets?
We want be consistent in valuing the assets and the liabilities so that we are comparing like with like. For example, we could value both assets and liabilities using a discounted cashflow approach using the same discount rate. Alternatively, we could value assets using their market value. This implicitly values assets using a market-consistent interest rate. So we should also use a market-consistent interest rate to value the liabilities. Best wishes Mark
It's easier to answer this if I know the context. Can you give me a reference to the part of the course you are looking at please. Thanks Mark
I am not referring to any particular part of the course. The valuation yield for liabilities is based on the investment return for assets. How does it make sense in terms of cash flows of assets and cash flows of liabilities?
Let's leave this one then if it's not related directly to the course materials. Setting valuation interest rates is quite a controversial topic and practice varies throughout the world. There's not space to cover every angle here. As I said above, I think the key issue to think about is consistency between asset and liability valuations. I'm not sure that saying more would help people to pass ST2. We give more detail in SA2. Best wishes Mark
