Key Things Flashcards
1
Q
What are the 1st set of factors affecting Investment Strategy (ch25)
A
SOUNDER TRACTORS
Size of assets (abs/rel)
Objectives (consisten with)
Uncertainty of liabilities
Nature of liabilities (fixed in monetary/real or varying terms)
Diversification
Expertise/expenses
Return (long term, from all asset classes)
2
Q
What is the second half of factors affecting Investment Strategy? (ch25)
A
Tax (assets/investor/company) Restrictions (statutory/voluntary) Accrual of liabilities (future) Currency/geographic location of liabilities Term of liabilities Other investors Risk appetite - amount prepared to take on Solvency/valuation requirements
3
Q
Why might you prefer a low yield (possibly bonds over equity)
A
Radioactive Matrices Trash Values
Reinvestment of income is less->lower dealing costs
Matching - may be little short term outgo to meet
Taxed more on income that CGT
Volatility - low income assets have longer DMT so are more volatile, expect higher return
4
Q
State the 2 principles of investment
A
- Select investments appropriate to the
Nature/term/currency of the liabilities and the providers risk appetite - St (1), select investments to maximise overall expected returns on assets (income and capital gain)
“To the extent the company doesn’t follow these, it opens itself to risk”
5
Q
What is the formula for net liabilities?
A
NL=BPEP
NL =Benefit payments + expense outgo - premiums/contributions
=Benefits+expenses-premiums
6
Q
What assets match liabilities guaranteed in money terms?
A
Assets providing flow of income/capital to match liab outgo
Cash, FI bonds
7
Q
What assets match gurantees in terms of an index?
A
Assets whose returns are linked to the relevant index (prices, pay awards etc.)
Real assets, index components
8
Q
What assets match discretionary liabilities?
A
Pursue maximum returns subject to members reasonable expectations
Equities
9
Q
What assets match investment linked liabilities
A
The matching investments
10
Q
What restrictions might you have on investment strategy? (ch27)
A
ACE TERMS
Amount of specific assets allowed to be held e.g. to demonstrate solvency
Custodianship of assets
Exposure to single counterparty
Types/quality of assets invested in Exchange/currency matching for A and L Requirement to hold a given asset Mismatching reserve / allowable amounts Self-investment
11
Q
What are the actuarial and non-actuarial techniques for developing investment strategy? (ch28)
A
Ha! Pimp Rim!
Hedging
ALM
Peer group benchmark (non-act)
Index tracking (non-act)
MVPT without liabs (non-act)
Pure-matching
Risk budgeting (stra/active/struct risk)
Immunisation
MVPT with liabilities
12
Q
What factors affect individuals investment strategy (as well as SOUNDER TRACTORS)
A
DUFF VENDER
Diversification
Uncertainty of income/outgo in future
Freedom/constraints for investments
Feel good factors/returns
Volatility of market values Excess asset level Nature of assets/liabilities Direct investment difficulty like cost Expertise required, expenses incurred Risk appetite and cashflow requirements
13
Q
What should you think about before a tactical allocation switch?
A
FRED
Free asset level
Returns additions vs risk additional
Expense incurred
Difficulties in switching a large portions and constraints
14
Q
Why choose monetary assets?
A
SDVR
Short term investment
Diversify
Value is good
Risk appetite (risk averse)
15
Q
What are the 4 categories of liability outgo?
A
GID
Guaranteed: Money-terms In terms of an index (price index mainly) Discretionary Investment linked
16
Q
What does actual liability outgo depends on?
A
Value of constituent parts
Frequency of payment (probability of it)
17
Q
What factors come together to create a companies risk appetite?
A
Nature of institution
Constrains of governing body
Legal and statutory controls
18
Q
What reasons might Actual return differ from benchmark? (active and passive funds)
A
PEP SET
Performance impacted by market conditions
Errors in tracking, lack of exact match of investments
Poor stock or sector selection
Size of investment funds in each year affects MWRR measurement
Errors in benchmark data, for example publication of it, leads to errors in tracking correct assets
Timing of cashflows, possibly through forced disinvestment makes a difference
19
Q
What factors might a Pens scheme consider in choice of an invesmtent manager (as well as all the investmen return)
A
QQ PA COCK
Quality of operations and audit
Qualifications of personnel and training
Publicity surrounding them
Access to investments limits, e.g. withdrawal penalties
Charges - size and frequency
Objectives, can they keep in line with them
Communication quality
Key personnel changes frequent or not
20
Q
What 3 risks make up overall risk of a fund investment?
A
Active risk
Strategic risk
Structural risk
21
Q
What is Active risk?
A
The risk of the fund performance not matching the benchmark due to investment manager decisions
22
Q
What is Strategic risk?
A
The risk that the strategic benchmark we’re following doesn’t actually match the liabilities
23
Q
What is Structural risk?
A
The aggregate of the inidivdual benchmarks doesn’t match the overall benchmark
e.g. x% FTSE 350 + (1-x%) Small cap returns doesn’t equal FTSE All-share return
24
Q
What are the problems with matching liabilities?
A
Liability timing is uncertain
Terms of available assets not long enough
Asset income > liability outgo in earlier years
Trading costs prohibitive whether fequent or one-off large trade
Excessive amount of securities might be bought when the matching porfolio should cost the least with regard to the level of certainty required to meet liabs
25
What is liability hedging and give 2 examples
Where assets perform in line with liabilities, immunisation and currency matching
26
What are the problems with immunisation?
DRASTIC-Profits
```
Dealing costs are 0
Rebalancing constantly
Aimed at fixed monetary liabs
Suitable long durations may not exist
Timing of liabilities unknown
Int rate changes are small
Curve of yields is not flat
Profits immunised against except for small second order profit
```
27
What are the 3 things immunisation does?
1) Same PV's of assets/liabs
2) Same DMT
3) ConvA>ConvL
28
How do you measure active risk?
Using active money positions - amount of over/under exposure of each stock relative to strategic benchmark
Retrospective tracking error - annualised sd of difference between fund and benchmark performance
Prospective tracking error - modelling future experience based on current holdings, expected volatility and correlations
29
What is risk budgeting, and what decisions do you make about active risk?
Establish how much risk to take and most efficient place to take it
Decide on allocation of max overall risk between active and strategic
Decide on allocation of active risk across component portfolios
30
What other things apart from SOUND ATTRACTORS effect investment strategy
Liquidity, if immediate large cash needed for liabilities
Ethical/consistent aim investment
Cost of investing
Features of available assets
Risks associated with assets relative to liabs
ACTUAL AIM OF INV STRAT!
31
How do you match expenses in your funds?
Linked to prices/inflation
| Match it to real assets - equities or IL bonds
32
What assets match liabilities of known amount, know times (providing mortality fluctuations can be ignored). What is a slightly riskier match, and the problem with it?
Fixed interest guaranteed bonds.
| Corporates/equity, risk is insolvency
33
What risk comes with not being able to match assets with term of liabilities?
Reinvestment risk
34
How can we minimise risk in our investment policy?
We could match liabilities, using immunisation
35
What effects the extent to which we go away from the 'minimise risk' principal and mismatch instead!
Level of free assets
| Can invest in ordinary shares for long term and use free assets to protect from short term volatility
36
Why invest in equities in your pension fund, what problems can it cause?
Expected long term return higher than others
Volatile so larger capital requirements
No guarantee of the return
Can't match with liabilities of annuities
37
Why invest in corporate bonds in your pension fund, what problems can it cause?
Higher return than govt because less marketable, default risk
Bonds by the EIB, World Bank are guaranteed by groups of government, very secure but higher yield than govt because less marketable
Marketability not an issue since assumed kept till maturity for matching liabilities
Default risk lower than equity
38
What alternative investments than equity and corporate bonds can increase return for a DB scheme?
Switching activity when invested in governemtn bonds
Overseas assets, but currency risk
Derivatives/swaps/options strategy, but costs high
39
When a mismatching reserve is required, what do regulations do with the surplus level?
The more an investor decides to invest in riskier assets with higher expected return, the higher any resulting reserve
This increases liabilities and reduces available surplus
40
How can we monitor the experience of investment fund management?
Regular reassessment of A and L to ensure current investment objective correct
Investment manager level - peformance monitoring and risks undertaken
Mnagement structure level - check overall balance of investments still appropriate
Strategic level - investment limits and asset types
Any new asset classes to be considered?
41
What are the 3 main reasons you'd prefer passive investment?
Lower costs
Higher returns
Uncomplex to discuss
42
Describe actuarial techniques to determine investment strategy
Objectives stated wrt A and L
Model created to project liability and assets cashflows into future
Outcome compared to objectives and process repeated to find optimum strategy
Deterministic or stochastic modelling can be used, the pros and cons
43
What 5 things make up the risk control cycle?
```
IMCFM
Identify
Measure
Control
Financing
Monitoring
```
44
What 5 things help u identify risk?
```
DR RUB
Desktop analysis
Risk register
Risk analysis at high level
Upside potential
Brainstorm with roject experts and senior management
```
45
How do you mitigate risk?
```
FAT SIR
Further research
Avoid
Transfer
Share
Insure
reduce
```
46
What are the sources of financial risk?
Credit
Market
Business
Liquidity
47
What are the non financial risks?
Ops
| External
48
What are the canons of lending (things u check before u lend)
```
CASPAR
Character and ability of borrower
Amount of loan
Security of loan
Purpose
Ability to repay
Risk vs Rewards
```
49
What 3 things do u need for insurable risk?
1. Interest in the risk (ph has interest in it)
2. Financial and quantifiable nature is the risk
3. Amount paid by insurer related to financial loss incurred
50
What 6 things is it nice to have for an insurable risk?
```
MUDPIS
Moral hazard avoided
Ulitmate liabliity limit
Data with which to price the risk
Pooling of similar risks
Independant risk events
Small prob of occurence
```
51
What is in risk matrix, where we identify risks in the company
```
PNE FC PB
Political
Natural
Economic
Financial
Crime
Project
Business
```
52
What's the difference between diversification and hedging?
D takes on uncorrelated risks
| H takes on negatively correlated risks
53
How can we manage risks, what are the tools, which risks are retained in the business?
```
MURDA
Managments control systems (r)
Underwriting and claims control (r)
Reinsurance
Diversification (r)
ART
```
54
What management control systems exist?
```
DAMS
Data checks
Accounting/auditing
Monitoring liabs
Special care with options and gtees
```
55
How can we diversify?
```
GIA-C
Geographical
Insurer
Asset sector and stock picks
Class of business
```
56
What is the process from a policyholder wanting a policy and claiming?
```
UPCC
Underwrite
Policy inception
Claim
Claim control
```
57
What types of underwriting can you have?
MiLF
Medical
Lifestyle
Financial
58
What stages of u/w do u have? e.g. proposal form
Proposal form
Doctor report
Medical exam
Specialist tests
59
What does a company do underwriting?
SAFERR
Substandard lives - identify and offer speciali terms
Anti slectionand moral hazard avoid
Financial underwriting reduces risk of over/under insurance
Experience ensured close to that expected in pricing
Risk classification, relevant and fair premiums to all
Reinsurance easier to obtain
60
What types of ART are there?
```
PISSDD
Post loss funding
Integrated risk covers
Securitisation
Swaps
Insurance derivatives
Discounted covers
```
61
What are the advantages of ART?
```
DESCARTES
Diversification
Exploit risk as an opportunity
Solvency management, capital management
Cheaper than reinsurance sometimes
Availability when reinsurance isn't there
Results smoothed
Tax advantages
Effectibe risk management
Secuirty improved
```
62
Why do insurers need capital?
```
REG CUSHION
Regulatory requirements for solvency demonstration
Expenses at start up or launch new product
Gtees and options solvency being greater
Cashflow timing and management
Unexpected events
Smoothed divis/bonus/profit
Help maintain credit rating/NB
Investment freedom
Opportunites e.g. merger
NB strain
```
63
What are the sources of capital?
```
SCRIBES
Subordinated debt
Contingent capital
Reinsurance like fin reins
Internal restructure
Banking products
Equity
Securitisation
```
64
How might banking products give us capital?
```
SLCD
Senior undescured financing
Liquidity facilities
Contingent capital
Derivatives
```
65
What types of internal restructuring give us capital?
```
WD-MCR
Weaken basis
Defer surplus
Merging
Change assets
Retain profits
```
66
What are the 3 main reasons to monitor the experiences?
AMC
Assumptions updating
Management info
Corrective actions
67
What types of claim control exist?
```
CLEO
Claim form
Estimates
Loss adjuster
Ongoing monitoring
```
68
In risk control, what are the 3 types of reinsurance?
Proportional
Non proportional
Financial
69
What 2 types of porportional reinsurance exist
Quota share
| Surplus
70
What types of non proportional reinsurance exicst?
```
RACS
Risk xl
Agg xl
Catastrophe xl
Stop loss
```
71
Define financial reinsurance
Reinsurance to improve solvency position using regulatory arbitrage
72
Definie proportional resinsurance
Reinsurer pay x% of claims from each risk
73
Define non proportional reinsurance
Reinsurer pays claims between a lower limit R and an upper limit U
74
Definte quota share
Proportional reisnurance
| Reinsure same x% for all risks
75
Define surplus reinsurance
Proportional
| Proportions x1, x2, x3...varying by risks
76
Define risk xl
Non prop
| Individual losses, single risks
77
Define aggregate xl
Non prop
Agg losses over longish time period about 1 yr
Specified perils
78
Define catastrophe xl
```
Non prop
A type of agg xl
Small time period e.g. 72 hours
Specified event e.g. terrorism
High R
```
79
Stop loss definiintion?
Non prop
Agg xl type
Covers all perisls over whole account
80
What are the reasons for and benefits of reinsurance?
```
SAD LIFE
Smooth results
Avoide large 1 off losses
Diversification
Limit exposure to single risks accumulated
Increases capitacity to write NB
Financial assistence of solvency and NB strain
Expertise
```
81
What kind of expertise may a reinsurer give you?
Data, pricing, underwriting, administration, design
82
When considering security of loan, what else do you consider? (in terms of if we securitise it, what do we need to consider)
```
MANIAC
Market circumstances
Available security
Negative comparable strength
Intentions of loan
Amount it costs to realise the security
Covenant of borrower
```
83
Give examples of operational risk
```
3rd IDR
3rd party reliance
Inadequate ppl/processes or systems
Dominance risks
Recover plan failure
```
84
What is external risk
Non financial risk
| e.g. fire, stomr, terrorism
85
Define liquidity risk
The risk insufficienct resources to meet obligations as they fall due
we can get the resources but only at excessive cost
86
Market risk definition
Risk of asset value changes
Changes in rpice, interest rate, inflation
Can be risk of liability value changing
So the risk of mismatching A and L
87
Define business risk and give examples
Risk specific to the business taken on
| Poor u/w, cliamis experience, big exposures, unsuccessful project
88
Define credit risk
The risk of asset defaul, counterparty risk or general debtors defaulting
89
Explain liquidity risk in more detail
Where the market doesn't have capicaty to handle the volumne of assets to be bought or sold at that time,..
without portential adverse price imact
90
Why is perfect matching impossible?
```
PROD
Prohibitive cost of maintaing
Range of assets not large enough
Option products with uncertain c/f
Discretionarly liabilityies are possiible
```
91
In what situation witll reinsurance happen?
It happens when it is the mutual satisfaction of the risk transfer
Price at which A will accept the risk is less than the price at which B is willing to pay to remove the risk (ie. it's percieved cost)
92
What 3 things is risk appetite related to?
ECC's
Existing exposure
Cultutre
Company structure
93
Why carry out regular investment reviews?
L-FUCK
Liability stucture changes significantly
Funding position changed significantly
Underperforming and overperforming from o ther funds is significant
94
What types of risk measure are there?
Assets risks - active risk measures
Liab risk - Analyse A vs L
VAR - potential loss over given period to a given confidence interval
TailVar=Exp shortfall = Given we're are in a loss situation at a given quarrtile, how big is the expected loss
95
Aims of risk management?
Bernie Brown will SCORE
Strategies for risk management are all evaliuated
Constraints relevant are considered
Ops and financial efficiencies expoloited
Risks financial and non-fin incorporates
Exploit hedges and portfolio effects
96
What help is risk management to you?
```
CONTROL
Confidence of stakeholders
Opportunites better identified
Niftier management and capital allocation (increased growth and reutnrs)
Taper surprises
Risk...
Opportunity expoloited
Lower risk and higher quality/stability in biz
```
97
What is the UK risk reporting measure, explain it?
ICA
| Find the capital requiement needed to survive at a ruin probability of 0.5% over 1 year
98
Why use scenario analysis in rsk evaluation?
Full math model inapproporaite
Ops risk mainly
Subjective parameters, unsuitable risk to model
99
Explain 4 steps in scenario analysis, for ops risk
Group risk exposures into borad categories like financial fraud
Come up with plausible adverse scenario for each group like steals 100m
Clculate consequences of each even like fined 10m pounds
Clauclte total financial cost from all risks represented by the scenario
100
Give 3 advantages of scenario analysis in risk measuring
Subjective params
IT requirement not complex
Evaluated non-fina risk
101
Gives 3 disadv to scenario analysis in risk measurement
Subjective scenarios
Time consuming
Key scenarios might be omitted
102
Give 3 advantages to stoch models in ERM
Full distribution of results
Interactions between vairables
Calcuation of risk measures like VAR possible
103
What is and Why do risk cliassification?
Analyse portfolio by risk characteristics
Premium calcs more accurate
Focus cover
Eliminate unnecesary design features
104
What advantages does non-prop reinsurance have?
Can accept v large cliaim possibilities
Smooths results
Insolvency risk lower
105
3 advantages of prop reinsurance
Spreads risk
Larger risks can be covered
Recipricol arrangements encouraged
106
Give a disadvantage of Quota share?
Cedes a % of the profitable business
107
Give a disadvantage of surplus reinsurnace
V large claims can still effect us
108
Give 3 disadvantages of stochastiv models in ERM
```
Expensive
Time consuming
Complicated to explain to non-experts
Spurious accurancy
Significan computing power
Distributions are difficult to determine
```
109
Describe stree testing in ERM
Subject asset portfolio or A and L to extreme market movements by changing underlying assumptions and characteristics
Gives idea of sensitivity to risk factors
110
Give 3 advantages to stress testing in ERM
Easier to communicate than stoch
IT req less than stoch
Transparent and simple model to analyse
111
Give 3 disadvantages to stress testing in ERM
Choice of stress test/prameters/correlations is subjective
Not all possible interactions can be allowed for
Results need to be interpreted carefully
112
Give 2 reasons to do stress tests
Identify weak area and their sensitivites
| Gauge impact of major market turmoil with correlated variables
113
How do we diversify risks?
```
R-GRAIL
Recipricol reinsurance
Geographical areas
Reinsurance
Asset classes
Individual assets
Lines of business
```
114
Why do we use claims control?
Reduce fraudulent claims
| Reduce excessive claims
115
Ince the initial u/w process is complete, what do the underwrites then do?
Interpret the info with help of manuals and company doctors
116
What changes to someones policy might come as a result of underwriting?
```
REASD
Reduced benfits
Exclusion clause
Additional prem
Standard terms changed
Declined temporariliy or permanent
```
117
How does checking data reduce risk?
Reduces ops risk
| Adequate provisions
118
How does accounting and auditing reduce risk?
Proper provisions
| Stakeholder confidence
119
How does monitoring liabilities reduce risk?
Risk aggregation is protected
120
Why do we do capital maanagement?
Maximise reported profits
| Sufficient solvency to cover liabilites and growth aspriations
121
Why do all business need capital?
```
SPEWS
Start up capital for equipement, staf, buildings
Protections against trade volatility
Expansion
Work in progress financings
Stock financing
```
122
In Basel 1, hwo many tiers, what % of value of assets is required, what propotion of tier 1 capital is in total required capital
2 tiers
8#% of Va weighted to assets
Greater than 50%
Cap req=T1+T2 reqs
123
In Basel II, how many pillars are there, what does it reward and how?
3 pillars
| Effective risk management and measuring is rewarded with a lower capital requirement
124
In S2, what is P1, 2, and 3
Quantification of risk exposures and capital requirement
Supervisory regime
Disclosure
125
What happens if we fall below the MCR?
Muse cease trading
126
What happens if fall below SCR
Discuss remdedy with regulator
127
What is the advantage of the standard formula
Less comple and time consuming
128
What is disadvantage of standard model?
Capitures riks of avg copany
| Not most appropriate to that company
129
What is EC in 1 line
Internal capital assessment appropritate to the assets, liabs and business objectves
130
Why montiro investment strategy?
FLIP
Funding positions may have changed sig
Liab structure changed sig
Inv perf sig ot of line with other funs
131
How can we reduce credit risk in loans?
```
LEFTT
Late payment penalty
Exposure to risk reduced
Further borrowing restrictions
Term considerations
Tranches of loan
```
132
How to reduce credit risk in projects?
```
SCREAM
Scrutinise ppl and proposal
Capiacity to seize control
Risk managment checking
Equity capital available
Active interest mainaining
Mitigate through share risk or transfer it
```
133
Whats the chart of risks?
Financial:
Market (assets, liablities, AL matchig)
Credit (asset defaul, counterparty, debtors)
Business (u/w, insurance, financing, exposure)
Liquiditiy
Non-fin:
Ops (bsiness continuioty, 3rd part admin)
External
134
What risks make up market risk
assets, liablities, AL matchig
135
What risk makes up credit risk
asset defaul, counterparty, debtors
136
What risks make up bsuiness risk
u/w, insurance, financing, exposure)
137
What risks make up ops risk
(bsiness continuioty, 3rd part admin
138
What do pensions contirbutions depends on?
```
Amount of promised benfit
Prob of individual being able to accruse ben
Prob individual able to recieve bens
Inflation effect on real level of ben
Inv return achieved on contirbutons
```
139
Given example of post loss funding
loan on pre arranged terms in event of specific loss for a commitment fee
140
what is securitisation?
transfer od risk to capital and banking sectors, allows diversification and similar cost to reinsurance
141
What types of insurance derivative are there?
Weather derivative
142
What are discounted covers?
Tranfer of the discounted liability value, reduces solvency requirement
143
Give an example of a swap between 2 non-insurance companies, and 2 insurance companies
Energy companies and household insurers, warm weather dislike / cold weather dislike
Reinsurer in japan with earthquake risk, one in florida with hurrican risk
Matching but negatively correlated risks, swap the packeges for diversification
144
What are the risks to benefits in a DB/DC scheme?
```
BENEFITII
Benefits changed by sponsor/state
Expected annuity rates higher than actual
Needs of memeber not met
Economic mismanagment
Failure by sponsor to pay contributions on time
Inadequate communicatios between all
Takeover of sponsor/provider
inadequae funds
Illiquid assets
```
145
What are the investment risks in DB and DC?
```
DR LOLITA
Default risks
Returns poor
Liquidity risk
Opportunity cost of capital
Lacking diversification
Inflation erodes the values
Tax and expenses erodes the value
Asset/liab mismatching and reinv risk
```
146
What might lease to a DB/DC scheme not having enough money to pay out
```
PREMIUM
Poor advice
Redress, fines and new taxes
Expense high and cost of gtees
Misappropritaion and fraud leading to loss of funds
Incorrect benefit payments
Unexpected tax rate/status changes
Mental decisions
```
147
Give 5 examples of Ops Risk
```
Company Structure Problems:
Business Continuity (after there's an earthquake)
IT systems failure (O:\ drive)
Unit pricing errors
Risk managment
```
```
Regulator Problems:
Internal Financial Crime (fraud)
Major project failure (SII)
Confidential Information lost
Tax compliance
```
```
Annoyance of Customers
Outsourcing failure (Diligenta)
TCF
Customer service failure (administration, transactions)
Mis-selling (PPI)
Inappropriate new business sales
```
148
What is Insurance risk?
The risk actual experience is different from what was expected when an insurance product was designed and prices
149
Give 3 wide-ranging examples of insurance risk?
```
Claims risk (magnitude and frequency)
Policyholder behavious risk (lapses, withdrawals, premiums not paid)
Expense risk (expenses with aquiring policies and associated with claims)
```
150
Give 5 types of risk not covered in the overall risk chart
```
Model risk (inappropriate use or not performing well)
Strategic (poor response to changed in business environment)
Regulatory (not complying with changes/requirements/expectations, leading to sanctions)
Reputation (risk negaitve impact on company from change in reputation amongst stakeholders)
Environmental (loss of companies reputation as a result of environmental concerns about the company or it's customers)
```
151
Give an example of a type of swap an insurer might do with a bailed out bank? For liquidity
Swap the banks illiquid assets for some high quality corporate bonds from the insurer (Lloyds and scottish widows)
152
How can we split stakeholders into 2 types?
Market (Primary) stakeholders - take part in economic transactions with business (stockholders, suppliers of products and servies like auditors, creditors, employees)
Non-market (Secondary) - Affected by a businesses actions, don't take part in economic activities with it (regulator, government, media, activists, community, trade unions)
153
How do bond prices moves versus interest rates?
Inversely,
Bank rate t0 = 4%
Price of bond: 100
Based on coupon of 5%
Bank rate t1 = 6%
Coupon still 5%
So must deacrease price of bond: 90
154
How does credit risk effect a bond price?
If the probability of a credit event or default is higher, then the bond is weaker, so cheaper for same yield (more yield for same price)
155
What is yield to maturity, what is GRY, what is the weakness with GRY?
YTM = the constant discount rate that can be used on all the bonds cashflows so the sum is equal to the price of the bond
The GRY is the YTM that doesn't take tax on the investor, dealings costs into account
156
What does a increased YTM (GRY) mean?
Cashflow discount rate has increased
Implies discounted value at time 0 is lower
ie. price is lower
157
What happens as the term to maturity gets higher on a bond (what yield is needed for a longer term bond)
P(interest rate increase) increases
| Required yield above bank rate increases
158
What happens to bond yields with inflation?
Inflation or expected inflation increases
| Bond yields must increase for loss of value of coupons (or price must decrease)
159
What mismatching restrictions might you have in Investment Strategy?
Reserve requirement
Limit to mismatching
More rikiness, more reserves required (higher liabilities and lower surplus)
160
What companies are effected by overseas markets/economies?
Exporters/Importers
Operations overseas
Outsourced manufacturing
Collective investment vehicles
Users of natural resources e.g miners/oil
Listings for arbitrage e.g. tax/political reasons
161
Split types of assumptions in pricing models into 3 groups, then give them
Peoples lives - mort/morb/persistency
External companies/ppl - expenses/NB
Economics - Inv return/Infln/Tax
162
Tell the free capital story of why you hold it, 5 headings.Expand the headings
Take on a project, has expenses, calculate the liabilities wrt regulations, show the results
Projects/ (Aggresive investment strategy, M&A, business efficiency)
Expenses/(Marketing, development, NB strain)
Liabs/ (Uncertainty/timing of outgo)
Regulations/ (stat/regulatory requirements)
Results/ (smooth cost of claims, smooth dividends, financial strength demonstration)
163
What information is required to perform a proffessional task?
```
What/Why/Who? CC
What (is the task)
Why (task in context)
Who (it's being performed for)
Conflicts of Interest
Complaints procedure
```
164
What are the 4 widely used accounting concepts?
Going concern (assume company will continue its operations)
Accruals (recognises costs as they accrue)
Consistency from year to year (in basis used, may have to change due to regulation)
Prudence (make provision for future costs even if they're uncertain)
