Investment Yield formula: CCIR vs MSA
Hello,
In the CCIR reading it states that Investment Yield = 2(I+PI)100/(Vb+Ve-I-PI)
and in the MSA Ratios reading it states that Investment Yield = 2*NII/(Invested assets at start of yr + Invested assets at end of yr-NII)
And NII according to CCIR would be IR + provision for credit losses.
NII under MSA would be Investment Income + Realized Gains/losses-Inv.Expenses.
In order for these two formulas to be equal then would realized gains/losses be equal to the provision for credit losses? I;m having a hard time understanding if these formulas should give the same result
Comments
No, realized gains/losses are actual gains and losses that are crystallized through selling of those assets. Provision for credit losses is an estimate for expected defaults on your loans. At a high level they are tow different formulas so they shouldn't necessarily be equal to each other
ok thank you! So I guess on the exam we'd have to know if they're asking a CCIR question or an MSA question and then apply the appropriate formula? I even noticed a difference in how ROE is calculated between the two papers, so would the same apply there?
Well usually if they want to test a CCIR question, there won't be enough information to calculate the MSA version of the formula. If there is enough information to do both, you would not be penalized for choosing either version anyways. And yes for ROE
What does PI stand for?
Its the share of net income (loss) of equity accounted investees