Can I interest you in a guaranteed loss-making investment?

(Jan 30, 2015)

Would you buy an investment which was guaranteed to lose you money?  This question was posed in a recent article in The Economist.  The author of the article was referring to the fact that short-term interest rates were negative in Japan, Germany and Switzerland.  This is not a recent anomaly either - Figure 1 shows that government bond yields in Switzerland have been below zero at short durations for several years now.

Figure 1. Yields by outstanding term for bonds issued by Swiss Confederation. Average annual yield curve 2012-2014.  Source: SNB.

Negative yields at short durations are one thing, but the ten-year Swiss government bond yield went negative in mid-January 2015, and it is still negative at the time…

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Tags: yield curve, interest rate, Strafzinsen

Discounting longevity trend risk

(Nov 12, 2012)

Establishing the capital requirement for longevity trend risk is a thorny problem for insurers with substantial pension or annuity payments.  In a previous posting I looked at the link between capital requirement and age, as well as the importance of model risk.  However, another important factor is the discounting function used for future cashflows.  This is illustrated in Figure 1, which shows the capital requirements implied by stressing the longevity trend over the lifetime of the annuitant.  This is done for the same projection model at various discount rates.  Besides the pattern with age, the most obvious feature is the strong dependence of the capital requirement on the discount rate used.

Figure…

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Tags: Solvency II, ICA, longevity trend risk, yield curve

Ahead of the curve

(Dec 20, 2011)

In an earlier post we looked at the implications for savers of the historically low interest rates in the UK.  Low interest rates are a policy response to the unusual economic conditions in which the developed world currently finds itself.  Besides being bad for savers, low interest rates increase the value of liabilities for pension schemes and can thus aggravate pension deficits.

However, these record low interest rates only apply in the short term, with a steep rise to a more normal longer-term rate.  This is shown in Figure 1, which plots the redemption yields for UK government gilts on 16th December 2011.  The points appear to follow a smooth underlying pattern, known as the yield curve.

Figure 1. Redemption…

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Tags: interest, yield curve

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