Chapter 16: Unit Pricing

Question 1

The basic equity principle:

Answer 1

The interests of unit-holders not involved in a unit transaction should be unaffected by that transaction.

Question 2

Internal unit-linked fund:

Answer 2

• An internal unit linked fund consists of a clearly identifiable set of assets, for example equities, properties, fixed-interest securities and deposits.
• The fund is divided into a number of equal units consisting of identical sub-sets of the fund’s assets and liabilities.

Question 3

Management box

Answer 3

• The management box for a fund consists of units that have been created but are not owned by policyholders, at any one point in time.
• These units are therefore owned by the life insurance company itself.

Question 4

Appropriation price

Answer 4

The appropriation price is the amount of money that the company should put into the fund in respect of each unit created in order that the interests of existing unit-holders are not affected.

Question 5

Expropriation price

Answer 5

The expropriation price is the amount of money that the company should remove from the fund in respect of each unit in order that the interests of existing unit-holders are not affected.

Question 6

The calculation process - Appropriation price (5)

Answer 6

This can be calculated as follows:

1. the market “offer price” value of the assets held by the fund plus the expenses that would be incurred in the purchase and any stamp or other duty payable in respect of such a purchase.
2. plus the value of any current assets, such as cash on deposit or investments sold but not yet settled.
3. less the current liabilities, such as investments purchased but not yet settled or loans to the fund.
4. plus any accrued income, such as interest income from fixed-interest securities and deposits, net of any outgo, such as fund charges.
5. less any allowance for accrued tax, if applicable.

Question 7

The calculation process - Expropriation price (5)

Answer 7

1. the market “bid price” value of the assets held by the fund plus the expenses that would be incurred in the sale.
2. plus the value of any current assets, such as cash on deposits or investments sold but not yet settled.
3. less the current liabilities, such as investment purchased but not yet settled or loans to the fund.
4. plus any accrued income, such as interest income of fixed-interest securities and deposits, net of any outgo, such as fund charges.
5. less any allowance for accrued tax, if applicable.

Question 8

The offer price of units

Answer 8

The offer price is the price at which units are offered for sale to the policyholder.

Question 9

The bid price of units

Answer 9

The bid price is the price at which units will be bought from the policyholder.