Discount Rate Magic

By Ramesh Akkineni

from an article in Business Standard

DaimlerChrysler said in its disclosure that the SEC had asked for information “relating to the discount rate and discount rate methodology” that it had used in calculating retirement benefits for its employees in North America.
The discount rate is the most powerful of all the actuarial assumptions used in pension calculations. Tiny fluctuations in the chosen rate can translate into billion-dollar differences in the pension values that a company the size of GM reports to its shareholders.
In its latest financial report, GM said it had pension obligations of $89.4 billion and had set aside $90.9 billion to pay them. For every 0.25 percent reduction in its discount rate, GM has said, its obligations would increase by $2.3 billion.

Popular posts from this blog

It Pays to be a Nervous Wreck

By Ramesh Akkineni
from an article in Livemint Two weeks ago, Microsoft issued the sort of quarterly report usually seen of a company in finest mettle. Redmond’s sales were up 15% and profit double that, excluding certain deferrals. And the rest of the year, it projected, would be just as sanguine—certainly unlike in the economy as a whole. Elsewhere, that would be a mandate for staying the course. In Redmond, though, they were crossing off days on their calendars, waiting until Friday, the first day of February and thus the first opportunity Microsoft would be able to truthfully state, “Okay, Yahoo, it’s been a year since we talked to you guys; where’s the beef?” Microsoft remains obsessed about Google because it reads the same things everyone else does about how Google’s style of free, “in the cloud” computing means the slow and steady decline of Windows and Office. That’s a technical debate, one in which both sides have good arguments. But....
Read more

Korean Model

By Ramesh Akkineni
from an article by Ha-Joon Chang in the Guardian In my lifetime Korea has lived through one of the greatest development miracles – half a century ago, its annual per capita income was around £50, less than half that of Ghana at the time. Today, it stands at £12,000, putting it on a par with Portugal and Slovenia. How was this possible? Korea of course did things that most people agree are important for economic development, such as investment in infrastructure, health and education. But on top of that, it also practised many policies that are now supposed to be bad for economic development: extensive use of selective industrial policy, combining protectionism with export subsidies; tough regulations on foreign direct investment; active, if not particularly extensive, use of state-owned enterprises; lax protection of patents and other intellectual property rights; heavy regulation of both domestic and international finance. The Korean experience shows that sustainabl...
Read more

Maxims from Poor Richard 3

By Ramesh Akkineni
Image
from Poor Richard's Almanac, 1735 Look before, or you'll find yourself behind. Bad Commentators spoil the best of books, So God sends meat (they say) the devil Cooks. Approve not of him who commends all you say. By diligence and patience, the mouse bit in two the cable. Full of courtesie, full of craft. A little House well fill'd, a little Field well till'd, and a little Wife well will'd, are great Riches. Old Maids lead Apes there, where the old Batchelors are turn'd to Apes. Some are weatherwise, some are otherwise. Dyrro lynn y ddoeth e fydd ddoethach. The poor man must walk to get meat for his stomach, the rich man to get a stomach to his meat. He that goes far to marry, will either deceive or be deceived. Eyes and Priests Bear no Jests. The Family of Fools is ancient. Necessity never made a good bargain. If Pride leads the Van, Beggary brings up the Rear. There's many witty men whose brains can't fill thei...
Read more