Unit Pricing Flashcards
Basic Equity Principle
The interests of unitholders not involved in a unit transaction should be unaffected by that transaction
Basic unit price calculation
Value of pool of assets divided by number of units
Offer price
The lowest price at which the market is willing to sell assets
Bid price
The highest price at which the market is willing to buy assets
Named from the perspective of the party with the most power, in this case, the market
Unit offer price
The minimum price at which the insurer is willing to sell units to investors
Unit bid price
The highest price at which the insurer is willing to buy units from unitholders
Named from the perspective of the party with most power, in this case, the insurer
Management box
A.K.A manager’s box
The excess of units in the unit fund above the total units owned by unitholders. Theses are units owned by the company and used to facilitate the day-to-day management of the fund
Use of a management box will minimise the frequency of changes to the unit pricing basis
Appropriation price
The price at which the company creates units.
I.e. The amount of money put into the unit fund to create a new unit.
This is based on the offer price of the underlying asset in the market and is used to set the unit offer price and unit bid price when unit pricing is done on an offer basis.
Expropriation price
The price at which the company cancels units
I.e. The amount of money the company takes out of the unit fund to cancel a unit.
This is based on the bid price of the underlying asset in the market and is used to set the unit bid price and unit offer price when unit pricing is done on a bid basis
Calculation of appropriation price
= Mkt offer price of assets held
+ expenses associated with purchase
+ value of current assets
- value of current liabilities
+ accrued income
- accrued outgo
- allowance for accrued tax
= NAV on bid basis basis
÷ number of units at valuation date (before any transactions)
= appropriation price
Calculation of expropriation price
= Mkt bid price of assets held
- expenses associated with purchase
+ value of current assets
- value of current liabilities
+ accrued income
- accrued outgo
- allowance for accrued tax
= NAV on offer basis
÷ number of units at valuation date (before any transactions)
= expropriation price
List the situations in which the words “bid” and “offer” are used
1) Asset trade
2) Unit trade
3) To refer to bases used to price units depending on net cancelation vs net creation of units
Difference between appropriation price and expropriation price
The basis used for calculation.
The appropriation price is the unit price on an offer basis (i.e. When the insurer is creating units). The expropriation price is the unit price on a bid basis (i.e. When the insurer is cancelling units).
Difference between the appropriation/expropriation price and the “price of unit to investor”
The addition of initial charges
List the four potential unit prices
Bid basis - bid price
Bid basis - offer price
Offer basis - bid price
Offer basis - offer price
