CFA Level II, Vol 2, pages 192 to 194: The last sentence in the first paragraph of page 192 reads, " Therefore, the use of a higher discount rate…indicate a less conservative bias". But according to the solution to question 1 of example 4, page 194, Caterpillar is less conservative, even though it’s assumed interest rate of 7% is lower than that of CNH’s 9% interest rate? I thought 9% was higher than 7%. So per that statement on page 192, ( quaoted in part above), CNH with higher interest rate should rather apear less conservative, regarding its health care cost estimation. Can anybody let me know what I’m missing? Thanks.
less conservative bias = more conservative --> Higher discount rate = lower liability -> more conservative.
compare that with less conservative used in the 2nd statement. - lower discount rate of 7% => higher liability => less conservative.
the use of the word “bias” -->
Thanks a lot for the explanation.