Setting the discount rate is considered to be the most important aspect of any actuarial valuation. In this post, we have summarised some of the most common questions our clients and their auditors ask about choosing the right discount rate.
1) What is the correct way to set discount rate for AS 15, Ind AS 19 and IAS 19 valuations?
Setting the discount rate involves constructing yield curves from the raw trading data. As an overview, this involves calculating the yields-to-maturity using traded Government Securities. Different traded bonds will have different YTM, depending on the term of each bond and therefore yields would be different for each term. They would then need to be smoothed, interpolated and extraopolated to produce the full yield curve. The discount rate can be read off for the specific duration of Defined Benefit Obligation.