Discount Factor
Hi, can you please elaborate on timing/maturity date/issue date? e.g. For maturity 2021-6-30, why the timing is 0.5? My understanding is that the maturity date is the date where the contract end, and not sure why for 2025 we will discount 0.5 year.
Comments
You are bringing the liabilities back to Jan 1 2025, and assuming that the payment date is June 30th 2025. That's why you have to discount by half a year or 0.5
Could you explain more about how the maturity date relates to January 1, 2025? I might be misunderstanding the concept. My assumption is that the maturity date is when the bond matures, so the rate should apply before that date. I’m not sure I understand Step 1b—how do we match the discount rate for different maturities to the year?
The maturity date reflects the duration of the yield curve. For example, if your maturity date is 3 years away, that would mean that claim payments that will be paid out should be discounted using the yields implied by a bond maturing in 3 years. You basically have to match your liability with a reference rate. So liability due in 3 years, matched with bond maturing in 3 years, liability due in 2 years, matched with bond maturing in 2 years and so on and so forth