I can see how the deferred and accrued benefits can be mimicked by nominal bonds, but why is half of the future wage growth and half of the future wage inflation mimicked using bonds?
please read the last line just before exhibit 1. Silva presents… half of future wage liab is assumed to correlate closely to CPI and half of future wage growth is assumed to correlate closely with domestic equities.
cpk123 Wrote: ------------------------------------------------------- > please read the last line just before exhibit 1. > Silva presents… half of future wage liab is > assumed to correlate closely to CPI and half of > future wage growth is assumed to correlate closely > with domestic equities. CP, I read that but it still doesn’t make sense. Obviously half of the future wage liab should be mimicked using real rate bonds and half of the future wage growth should be invested in equities. What I don’t understand is the use of nominal bonds. Is this just used as a plug?
bpdulog Wrote: ------------------------------------------------------- > I can see how the deferred and accrued benefits > can be mimicked by nominal bonds, but why is half > of the future wage growth and half of the future > wage inflation mimicked using bonds? Because wage growth or wage inflation indexing occurs only up to retirement. So unless the firm provides inflation indexing post retirement, those liabilities will be tracked with nominal bonds (as the liability is fixed).
let me go back and look at the question later tonight will get back