i see this question which asks - what is the most appropriate rate to discount a company’s pension PBO?
a. Company’s own cost of capital
b. Yield rate of high quality corporate bond
Answer is (b), but i dont get get. I thought it should be (a) ie discount using comparable apple with apple. Any takers
Someone correct me if I’m wrong, but here’s my reasoning.
Companys own cost of capital > high quality corporate bond. Using a higher discount rate will give you a lower PBO estimate which is what you don’t want. Having a lower discount rate will give you a higher, more realistic PBO.
The exact reason has to do with its the rate you should assume if the company is planning on closing the entire pension fund. something along those lines.
thats pretty bs
thats pretty bs