Discount rate used in computing pension obligations

CFA Level II FRA
#1

Hi.

In the Wiley lectures, it is stated that the discount rate used to compute the present value of our pension obligation should be the rate of return on high quality bonds.

I am confused by this.

Shouldn’t our discount rate be the inflation rate? My logic is, we are going to need to pay a certain amount to our employees in the future, when the dollar is worth less than it is now. That is why we’re discounting it to the present value, and then adding interest expense each year to bring it up to its future value eventually.

Where does the rate of return on bonds come into the picture?

Thanks guys.

#2

you have a savings account. are you just going to put in enough at the rate of inflation?

or are you going to do inflation-PLUS?

Inflation Plus is provided by the rate of a high quality bond.