What discount rate should be used to value a cash-flow linked to final salary?
Author InfoKHORASANEE, ZAKI Abstract Evidence is presented for a model in which wage growth is positively correlated with equity returns after a time lag of 1 3 years. This model is used to derive the risk premium on an asset which provides a cash flow linked to final salary. Using historic UK data, it is estimated that this risk premium is 0.5% per annum, a much smaller figure than that normally assumed for the equity market. This result has implications for the discount rate that should be used to derive the fair value of final salary pension liabilities. Download InfoTo download: If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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- What discount rate should be used to value a cash-flow linked to final salary?
