Bond Valuation
The idea of the present value factor (PVF) allows Go Green Insurance Company to compress the time dimension factor by being tide to exclusively worry of the amount of money it should set aside for bond purchase in the future (when compounded with a 10% interest rate). This concept allows the company to have the flexibility to easily acquire alternative and desirable bonds through the medium of money and the flexibility for diversification.
This report provides various recommendations that are of significance for the Go Green Insurance Company to incorporate in order to minimize the cost of acquiring bonds.
- In order to consistently match the cost of bonds and its liabilities, there should be an ample volume of regular business transaction in the bond market to help maintain a reliable and stable bond prices (Kulikova et al., 2010). As such, the company should purchase cost effective and consistently moving bonds.
- The company should also purchase only bonds that make a well-defined future cash flows. Nonetheless, if the bond cash flows are not straightforward, for instance, in terms of property investment, equity investment or the bond amount is known yet it has a non-zero probability that bond issuer may avoid payments, then the company’s model should incorporate other computational elements like the equity dividends to help determine the future bond values (Patel & Daykin, 2010). This means that the company should focus on financial control process rather than the absolute level of bond and liability values produced within the same period.
It is therefore important to note that market consistency and the future cash flows are of higher significance in minimizing cost. The company should, therefore, adequately understand the bond market trend (both in the past, present, and future) and effectively forecast on the future cash flows for all the available bonds to determine the most cost effective bond to purchase.
References
Kulikova, L. I., Semenikhina, N. B., & Vetoshkina, E. Y. (2016). Application of actuarial calculations when building a report on company's financial position. Academy of Marketing Studies Journal, 20, 96.
Patel, C., & Daykin, C. D. (2010, May). Actuaries and discount rates. In Sessional Meeting Papers.
| PVF | Period | Bonds | Liability | ||||||||||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | Cash Flow | i | |||||
| 0.9091 | 1 | 5 | 2 | 3 | 7 | 9 | 0 | 100 | 55000 | 55,000 | 10% | ||
| 0.8264 | 2 | 5 | 2 | 3 | 7 | 109 | 100 | 30500 | 30,500 | ||||
| 0.7513 | 3 | 5 | 2 | 103 | 107 | 47000 | 47,000 | ||||||
| 0.6830 | 4 | 5 | 102 | 54350 | 54,350 | ||||||||
| 0.6209 | 5 | 105 | 60000 | 60,000 | |||||||||
| Price | 81.05 | 74.64 | 82.59 | 92.54 | 98.26 | 82.64 | 90.91 | Cost of Portfolio | |||||
| Quantity | 571.43 | 504.83 | 418.77 | 0.00 | 232.82 | 0.00 | 477.82 | 184895.47 |