Chapter 16 - Unit pricing Flashcards
What does an internal unit-linked fund consist of
It consists of clearly identifiable set of assets, for Eg. Equities, properties, fixed-interest securities and deposits.
What is the basic equity principle of unit pricing for an internal fund
The interests of unit-holders not involved in a unit transaction should be unaffected by that transaction
What is the Appropriation price
It is the amount of money put into the fund for EACH new unit created.
The amount of money put in is such that the net asset value per unit is the same after as before the appropriation
What is the Expropriation price
It is the amount of money the company takes out of the fund for each unit cancelled. This amount of money is such that the net asset value per unit is the same after, as before, the expropriation
How to calculate the Appropriation price
-The market ‘Offer price’ value of the assets held by the fund plus the expenses that would be incurred in the purchase
+ the value of any current assets, such as cash on deposit or investments sold but not yet settled
- less the value of any current liabilities, such as investments purchased but not yet settled or loans to the fund
+ plus any accrued income, such as interest income form fixed-interest securities and deposits, net of any outgo, such as fund charges
- any allowance for accrued tax, if applicable
Divided by the number of units existing at the valuation date gives the Appropriation price
How to calculate the Expropriation price
The investments of the fund are valued at the market ‘bid basis’ and expenses that would be incurred in the sale are deducted.
+ the value of any current assets, such as cash on deposit or investments sold but not yet settled
- less the value of any current liabilities, such as investments purchased but not yet settled or loans to the fund
+ plus any accrued income, such as interest income form fixed-interest securities and deposits, net of any outgo, such as fund charges
- any allowance for accrued tax, if applicable
Divided by the number of units existing at the valuation date gives the expropriation price
What is pricing on an offer basis
This is when the marginal transaction involves the creation of units.
This is the amount of money put into the fund being equal to the net number of units being created multiplied by the appropriation price.
What is pricing on the bid basis
This is when the marginal transaction involves a cancellation of units.
This is the amount of money taken out of the fund being equal to the net number of units being cancelled multiplied by the expropriation price
What are the adjustments usually made to the appropriation price
Initial charges and Rounding
What is the initial charges adjustments made to the appropriation price which in turn affects the offer price
When units are allocated to policyholders, companies may want to make an additional charge as a contribution to meeting other management expenses and commission payments and to profits.
This charge is also known as the ‘bid/offer’ spread.
What is the Rounding made to the appropriation price which affects the offer price
It is normal to quote prices to a certain number of decimal places. This could be done by rounding the offer price up and bid price down. Or vice versa
