Discounting [34]

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Bullet points include: Liquidity premium thus derived can at times be very substantial, e.g. c. 2% pa at end Sept 2008 Compounded over significant durations has large impact on: Pricing of annuities (bulk and individual) Buy-out terms available to DB  pension schemes Reserves required for such liabilities Decomposition of average corporate bond spreads into different elements (average A rated credit spreads) Source: Kemp (2009) , Wilson  (2008) and Barrie & Hibbert Residual spread compensation for liquidity and risks/costs of selling prior to maturity (‘Liquidity Premium’) Additional compensation for unexpected default losses (‘Credit Risk Premium’) Compensation for expected default losses (‘Expected Default Loss’)

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