Discounting [26]

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Bullet points include: Given a risk-free interest rate can then quantify risk exposures expressed by a given risky discount rate (such as a corporate bond yield curve) Important when considering how much of a given reference credit spread should be excluded when valuing e.g. annuity books Part of yield may be compensation for credit risk, e.g. expected default risk, part for liquidity risk etc. IAA (2013) refers to decomposition between: Credit risk: estimated using e.g. historical averages, Merton (1974) or Leland and Toft (1996) type models Liquidity risk: estimated using e.g. CDS negative basis and/or structural models, covered bonds, proxy methods or prices for “liquidity renting”

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