Spring 2014 no. 15
In this exam question, would the discount rate have been the same for HFT assets? And for HTM assets, I guess interest rate, modified duration and amortized value (not given)?
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In this exam question, would the discount rate have been the same for HFT assets? And for HTM assets, I guess interest rate, modified duration and amortized value (not given)?
Comments
First, note that this topic is discussed primarily in the CIA Discounting paper (versus the CIA Accounting paper).
Anyway, I looked at the following 2 additional exam problems that ask you to calculate the discount rate:
Both questions provide only market value of the bonds and neither problem specifies the type of bond. Presumably they can be any of HTM, AFS, HFT. I agree that is seems sensible to use amortized value for HTM bonds in the calculation, because that's how HTM bonds are valued on the balanace sheet, but these problems imply you should use market value, even in the case of HTM.
Note that the market value and duration of the bonds are used only as weights for calculating the weighted average of the yield. It's true that the market value and amortized value can be different, but the really important variable is the yield. That's because the yield determines the cash flow, and cash flow is the basis for the PYR (Portfolio Yield Rate). The definition of PYR is: (according to Section 4.2 of the CIA Discounting paper.)
Then in Section 4.3, they say that the PYR is the basis for selecting the discount rate.
As a final comment, I'm not sure why question 2014.Spring Q14 specified all bonds are AFS because they seemed to drop that condition in the other 2 exam problems (listed above) where you had to calculate the discount rate.