标题: inflation and plan benefits [打印本页] 作者: John10 时间: 2011-7-13 16:37 标题: inflation and plan benefits
if plan benefits are not inflation indexed, is it better to hold real rate bonds or nominal rate bonds?作者: pennyless 时间: 2011-7-13 16:37
I agree with janakisri, but can't seem to make sense of the solution...
Solution to CFAI 2010 Mock Exam problem 3 Part B answer for CarbX Corp:
"The CarbX pension plan is frozen, so there is no need for equity. Because there is no inflation indexation, the accrued benefit liability is the ultimate liability of the plan. This liability can be mimicked entirely with nominal bonds. This is accomplished by a sale of equities and purchase of nominal bonds"作者: oneboy 时间: 2011-7-13 16:37
If benefits are not inflation indexed, why would you hold real rate bonds (which are inflation indexed)?
see schweser book 2 page 55 paragraph 4作者: wake2000 时间: 2011-7-13 16:37
even if benfits are not indexed, but have active members, you may want to hold real return bonds for the wage inflation of the active members not the inactive members. That was on the 2010 CFAI mock.作者: bodhisattva 时间: 2011-7-13 16:37
but in the question above, it says the plan is frozen. doesnt that mean there is no more wage increases?作者: ohai 时间: 2011-7-13 16:37
In any case, real bond is better off ? right ? I am confused by Solution to CFAI 2010 Mock Exam problem 3 Part B.作者: liangfeng 时间: 2011-7-13 16:37
nominal pls
if the nominal value of benefits is not indexed to inflation, you want to meet these liabilities with assets that are not indexed to inflation either, nominal bonds作者: Iginla2011 时间: 2011-7-13 16:37
There is confusion here.
The key of the question is how to mimic the plan benefits if it is not inflation-indexed. Pls be noticed that you are in the perspective of a plan manager not the beneficiary.
For a plan manager, you have to control the risk from deviating from the benchmark. The plan benefit for retired people is fixed in amount. The future annuity payment is fixed. This is similar to the coupon payment of a nominal bond. Thus, nominal bond best mimic the liability作者: NakedPuts00 时间: 2011-7-13 16:37
1 if the plan is frozen, and benefit is not inflation indexed NOMINAL
2 if the plan is frozen, and benefit is inflation indexed REAL
3 if the plan is not frozen, and benefit is not inflation indexed BOTH
4 if the plan is not frozen, and benefit is inflation indexed REAL
With number 3, you hold accrued amount and future amount based on current wage in nominal, you then will hold the future amount from wage increases in real as wage growth will track closely with inflation.作者: mik82 时间: 2011-7-13 16:37
but why does it say in the CFAI book p. 450, first paragraph:
"For frozen busines plans the accrued benefit liablity is the ultimate liablity of the plan and has market exposures that are best mimicked by a cominbation of nominal and index-linked bonds."
Nominal = for what has accrued so far
Index-linked= even if the plan is frozen, it has members who still continue to work and their wages will increase in the future. Some of the wage increases will due to inflation.作者: bkballa 时间: 2011-7-13 16:37
is inflation indexed = real作者: strikethree 时间: 2011-7-13 16:37
i thought your equity portion would be an inflation hedge already
plus, if your plan is not linked to inflation, and you match this with TIPS, you are screwed when inflation rate < the nominal rate on the annuities.
