Chapter 16 - Unit pricing Flashcards

1
Q

What does an internal unit-linked fund consist of

A

It consists of clearly identifiable set of assets, for Eg. Equities, properties, fixed-interest securities and deposits.

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2
Q

What is the basic equity principle of unit pricing for an internal fund

A

The interests of unit-holders not involved in a unit transaction should be unaffected by that transaction

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3
Q

What is the Appropriation price

A

It is the amount of money put into the fund for EACH new unit created.

The amount of money put in is such that the net asset value per unit is the same after as before the appropriation

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4
Q

What is the Expropriation price

A

It is the amount of money the company takes out of the fund for each unit cancelled. This amount of money is such that the net asset value per unit is the same after, as before, the expropriation

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5
Q

How to calculate the Appropriation price

A

-The market ‘Offer price’ value of the assets held by the fund plus the expenses that would be incurred in the purchase
+ the value of any current assets, such as cash on deposit or investments sold but not yet settled
- less the value of any current liabilities, such as investments purchased but not yet settled or loans to the fund
+ plus any accrued income, such as interest income form fixed-interest securities and deposits, net of any outgo, such as fund charges
- any allowance for accrued tax, if applicable

Divided by the number of units existing at the valuation date gives the Appropriation price

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6
Q

How to calculate the Expropriation price

A

The investments of the fund are valued at the market ‘bid basis’ and expenses that would be incurred in the sale are deducted.
+ the value of any current assets, such as cash on deposit or investments sold but not yet settled
- less the value of any current liabilities, such as investments purchased but not yet settled or loans to the fund
+ plus any accrued income, such as interest income form fixed-interest securities and deposits, net of any outgo, such as fund charges
- any allowance for accrued tax, if applicable

Divided by the number of units existing at the valuation date gives the expropriation price

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7
Q

What is pricing on an offer basis

A

This is when the marginal transaction involves the creation of units.
This is the amount of money put into the fund being equal to the net number of units being created multiplied by the appropriation price.

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8
Q

What is pricing on the bid basis

A

This is when the marginal transaction involves a cancellation of units.
This is the amount of money taken out of the fund being equal to the net number of units being cancelled multiplied by the expropriation price

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9
Q

What are the adjustments usually made to the appropriation price that ends up being the offer price

A

Initial charges and Rounding

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10
Q

What is the initial charges adjustments made to the appropriation price which in turn affects the offer price

A

When units are allocated to policyholders, companies may want to make an additional charge as a contribution to meeting other management expenses and commission payments and to profits.

This charge is also known as the ‘bid/offer’ spread.

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11
Q

What is the Rounding made to the appropriation price which affects the offer price

A

It is normal to quote prices to a certain number of decimal places. This could be done by rounding the offer price up and bid price down. Or vice versa

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12
Q

What is Offer and Bid price

A

Offer price - The price at which units are offered for sale to the policyholder
Bid price - The price at which units will be bought from the policyholder

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