Chapter 16 Flashcards
How is the benefit of a unit-linked contract determined?
By the performance of the units which depends on the performance of the underlying assets.
How are expenses met in a UF?
By a variety of explicit charges - fixed or variable.
When do complications arise under a UF?
- Company creates units
- Company cancels units
What is an internal unit-linked fund?
It consists of clearly identifiable set of assets, e.g. property, fixed-interest securities and deposits.
The fund is divided into a number of equal units consisting of identical subsets of fund’s assets and liabilities.
With whom does the responsibility of unit pricing rest?
The company, subject to any relevant policy conditions.
Why do some companies create more units in internal linked funds than strictly necessary to cover unit liabilites?
- The excess can be useful for fund management, depending on systems used by the company - it reduces the need to cancel or create units each day.
- It is common to match as closely as possible the number of units in issue and that allocated to unit holders.
There are usually no statutory/other regulations on pricing units of an internal fund, so how is unit prices determined?
- Policy documents will normally state how the company will determine unit prices, e.g. the policy may specify how to determine the max prices for allocating units and the min prices for surrendering units.
When does a company have to determine the unit prices?
Only when transactions are taking place - prices at other times have no relevance to the fund, apart from use in measuring fund performance.
What are the only relevant prices for the unitholder?
The price at which the unit is allocated and redeemed.
* Movement in price between 2 events depend only on the performance of the underlying assets and the charges deductible.
Should the price at which units are allocated and redeemed be affected by the creation or cancellation of units?
No, otherwise cross-subsidies between PHs will arise.
What is the basic equity principle for an internal fund?
Interests of unitholders not involved in a unit transaction should be unaffected by that transaction.
Existing unitholders should be in the same position after the transaction as before.
What is the appropriation price?
The price at which the company will create units.
* It is the amount of money that the company should put into the fund in respect of each unit it creates in order to preserve the interests of the existing shareholders.
* It is the amount of money that the company should put into the fund in respect of each unit it creates such that the NAV per unit is the same as before the appropriation.
How is the appropriation price calculated?
- market “offer price” value of the assets held by the fund
- plus expenses incurred in the purchase of the assets (including stamp & any other duty)
- plus value of any current assets (e.g. cash on deposit or investments sold but not yet settled)
- minus value of any current liabilities (e.g. investments purchased but not yet settled or loans)
- plus any accrued income (e.g. income from fixed-interest securities net of outgo)
- minus any allowance for accrued tax if applicable
- = NAV of the fund on an “offer basis”
- / no. of units existing at the valuation date (before units were created)
- = appropriation price
What is the expropriation price?
The price at which the company will cancel units.
* The amount of money that the company should take out of the fund in respect of each unit cancelled to preserve the interests of existing unitholders.
* The amount of money that the company should take out of the fund in respect of each unit cancelled such that the NAV per unit is the same as before the expropriation.
How is the expropriation price calculated?
- market “bid price” value of the assets held by the fund
- plus expenses incurred in the selling of the assets (including stamp & any other duty)
- plus value of any current assets (e.g. cash on deposit or investments sold but not yet settled)
- minus value of any current liabilities (e.g. investments purchased but not yet settled or loans)
- plus any accrued income (e.g. income from fixed-interest securities net of outgo)
- minus any allowance for accrued tax if applicable
- = NAV of the fund on an “bid basis”
- / no. of units existing at the valuation date (before units were cancelled)
- = expropriation price
Which basis will be used if the fund is expanding?
The company is a net creator of units and so will value the fund on an offer basis.
Amount of money put into the fund = net units created * appropriation price
Which basis will be used if the fund is contracting?
The company is a net canceller of units and so will value the fund on a bid basis.
Amount of money put into the fund = net units cancelled * expropriation price
What is the offer price?
The price at which units are offered for sale to the PH.
What is the bid price?
The price at which units will be bought from the PH.
What are the different prices when the company is a net creator of units?
- Offer price, offer basis - price at which units sold to PHs
- Bid price, offer basis - price at which units bought from PHs = appropriation price
What are the different prices when the company is a net canceller of units?
- Offer price, bid basis - price at which units sold to PHs
- Bid price, bid basis - price at which units bought from PHs = expropriation price
Why would a company want to make an additional charge when units are allocated to PHs?
To make a contribution to meeting other management expenses, commission and other payments.
What are the three different situations in which the words bid and offer are used?
- Buying and selling of assets
- Buying and selling of units
- To refer to the basis used to price units
