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Discussion Starter #1
Hi, I was trying to gauge the impact of a new commuted value calculation. Going from +90bps to a spread of 0-150bps. It looks to me like it's always going to be worse/higher than 90 and most likely +150. I'm sorry for the long post, just trying to understand it. If anyone can decipher it. To me it looks like a lower commuted value guaranteed.

Here's the change. Below I will put the formula.


Consistent with the July 2017 Exposure Draft, the interest rate spread over the Government of Canada bonds will be a market-linked spread rather than a fixed 90 basis points (bps) spread. The first Exposure Draft’s proposed approach of adding a spread to Government of Canada bonds of 67% provincial bonds and 33% investment-grade corporate bonds is retained.

The second Exposure Draft proposes that a floor of 0 bps and cap of 150 bps be applied to the spread added to the Government of Canada bond yields used for determining commuted values (CVs). The purpose is to mitigate large interest rate spreads during unusual financial market conditions.

Depending on market conditions, the proposed approach could lead to a reduction (or increase) in CV amounts compared to the current standard. However, current market spreads indicate a much smaller impact on CVs than would have been seen 10 years ago during the financial crisis of 2008 and the years after. The introduction of the minimum and maximum spread will serve to mitigate impacts to CVs during times of extreme market fluctuations and instability.


The formula:

Four bond yield spreads should be determined, based on the index yields for the final
Wednesday of the calendar month immediately preceding the month in which the valuation
date falls, calculated as follows:
PS1-10 = (Canada Mid-term provincial bond index yield, annualized) – (Canada Mid-term
federal non-agency bond index yield, annualized)
CS1-10 = (Canada Mid-term corporate bond index yield, annualized) – (Canada Mid-term
federal non-agency bond index yield, annualized)
PS10+ = (Canada Long-term provincial bond index yield, annualized) – (Canada Long-
term federal non-agency bond index yield, annualized)
CS10+ = (Canada Long-term corporate bond index yield, annualized) – (Canada Long-
term federal non-agency bond index yield, annualized)
The bond index yields, before being annualized, referred to in this paragraph 3540.06.1 are
the average semi-annual mid market yields to maturity for each index published by FTSE
Canada Debt Capital Markets at the market close on the final Wednesday of the calendar
month immediately preceding the month in which the valuation date falls, or such other bond
index yields or calculation bases that may be promulgated from time to time by the Actuarial
Standards Board for purposes of these calculations.
The bond index yields used to calculate PS1-10, CS1-10, PS10+, or CS10+ are not the yields
published, but the annualized value of the published figures.
If PS1-10, CS1-10, PS10+, or CS10+ as calculated above is less than zero, the bond yield spread
should be set equal to zero. [Effective August 1, 2020]
.06.2 Two spread adjustments should be determined as follows:
s1-10 = (0.667 * PS1-10) + (0.333 * CS1-10)
s10+ = (0.667 * PS10+) + (0.333 * CS10+)
If s1-10 ors10+ as calculated above is more than 1.5%, the spread adjustment should be set
equal to 1.5%. [Effective August 1, 2020]
 

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Hi, I was trying to gauge the impact of a new commuted value calculation. Going from +90bps to a spread of 0-150bps. It looks to me like it's always going to be worse/higher than 90 and most likely +150. I'm sorry for the long post, just trying to understand it. If anyone can decipher it. To me it looks like a lower commuted value guaranteed. ...
... a bond dummy here (unless you're talking about double-Os-7 and I can then blab all about him).

Seriously, why do you need to decipher the effects of lower interest rates on cvs as 1. in the "real world" there is no such thing as a "guaranteed" cv in the first place, and 2. a lower interest rate would "supposedly" have the opposite effect on cvs meaning "theoretically" a "higher" cv calculated.
 

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Discussion Starter #3
I'm implying of the 2 cv calculations, the one coming into effect later this year sounds like it has no chance, really, of ending up with a higher cv than the current formula. As I'm sure that's the idea with industry in control.
 
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