I have read pension and post retirement chapter many times but still I am not clear with every concepts as there are so many confusing stuff (pension obligation, periodic cost, economic expenses etc.) I tried to do many questions as well not useful: Could please some 1 tell me what all simple formulas I need to know to solve pension question in exam: its would be really helpful for me
They are there in the book and they are only 3 or 4 formulas. If you are able to understand pensions from reading the CFAI book, you are a true genius. That’s the worst chapter ever written…in the history of mankind, if I may add. You need access to a better way of explaining it.
haha you are right… I am not sure they using correct word at correct place and even they didn’t give example on everything… later chapter behind questions they doing some diff calculation 
Yeah, this stuff is a 13itch. Basically what they’ll do is tell you “something happened”, like dividend yields went up, or the firm will be using a higher discount rate this year. Then they’ll ask something like “how is pension expense affected?” so to answer it, you gotta know the pension expense formula, look at it, and see if anything is affected. pension expense = current service cost + interest cost - expected Return on plan A + Ammort of past service cost (or - gain) + Ammort of actuarial changes (or - gain) So for dividend yields going up, this means the stock value will go down (in theory), so the call options values go down (since they are further out of the money now), and my pension expense goes down (due to actuarial changes cost increase). For using a higher discount rate, you’re discounting the value of money you’ll owe in future. If you discount it at a higher rate, its PV is lower; which implies you don’t need to put as much money towards it (in other words, it lowers your pension expense). it’ll be a lot of stuff like this.
also you should know economic pension expense. econ pension expense = contributions - change in funded status. so if the funded status decreased (went from 14 million to 12 million) and the employer contributions were 3 million that year, the total economic pension expense would be: 3 - (-2) = 5 million also, the difference bet employer contribution and econ pension expense, net of tax, will need to be reclassified from cfo to cff if contributions are less than economic expense (b/c it’s like you’re borrowing money since you’re paying less than the actual economic expense).
thanks you… magicskyfairy and Paul yes I saw them asking such kind of questions affect on expenses due to various changes (specially discount rate and expected rate of return)
a bit off topic but sticking to pension’s, if interest rates decrease, does the affect on stock options increase or decrease net income? the way i understood it was that with lower interest rates the value of the option will be higher since your discounting at a lower rate (according to the model where you discount options) however the book says otherwise…
Higher risk free rate would increase the stock options value. So lower risk free rate would decrease it’s value. Risk free rate is same as saying interest rate, when you think of stock options.
C = S + P - X/(1+r) If rate (r above) goes up, the present value of the bond goes down, so you deduct less from the synthetic call price, so the call price goes up.