full yield curve

[Gary]

I am aware of the option for a plan sponsor to elect the full yield curve instead of the segment rate, but don't know how it is applied.

Is it the average rate for a particular month for maturity periods from 0.5 to 100 years or is it done another way, such as creating three rates?

And my understanding is that the plan sponsor must sign an election to use this method?

An example for say a 1/1/2010 valuation may be the best way to provide an explanation.

Thanks.

Gary

[SoCalActuary]

Gary, your question suggests that you have no actuarial training and/or don't read the regs.

If I have a series of payments at points 1,2,3, etc., then each of those payments is discounted back using the interest rate applied for that payment date. The full yield curve just is a different method for selecting those interest rates.

Once I have discounted each payment at its own interest rate, I have a present value. Now, for PPA funding purposes, that payment stream represents the benefit payments resulting from the accrued benefits at the beginning of the plan year, and is labeled the FUNDING TARGET. Given that same stream of payments, I can estimate the single interest rate that would produce the same FT, and I would call that the EFFECTIVE INTEREST RATE.

Maybe I am reading your question wrong, but are you referring to the method of selecting a month to use for the full yield curve?

[Gary]

I am just wanting to understand how to apply the yield curve.

As I see it the yield curve for a given month has a different at each year, thus to discount a payment stream would require a pv for each payment using a different interst rate for each payment as compared to the segment rates where the discounting uses a rate for 5 years, than 15 years and then a 3rd rate.

However with the full yield curve it would be a different discount rate for each payment in the stream of payments.

Is that correct?

I will revisist the regs as well.

Thanks.

[david rigby]

However with the full yield curve it would be a different discount rate for each payment in the stream of payments.

Theoretically, yes. You could use the analogy that each future payment is made by the maturity value of a zero-coupon bond, and all such bonds are purchased on the valuation date. Since each bond has a different maturity date, it can have a different discount rate. (A certain degree of simplicity is applied, since separate rates for each future monthly maturity date would be impractical, and probably provide no useful improvement in accuracy.)

[Gary]

Thanks David.

So by applying first principals on a spreadsheet valuation is the summation of all those discount rates the way a present value of a benefit would be computed? Or is it handled in a more simplistic way?

[SoCalActuary]

Thanks David.

So by applying first principals on a spreadsheet valuation is the summation of all those discount rates the way a present value of a benefit would be computed? Or is it handled in a more simplistic way?

No simplistic way. You need 100 or 200 individual points of benefit, with the same number of interest rates. Each period's benefit is discounted individually.