I've seen a couple of exam questions on Top down vs bottom up interest rates for IFRS. The PWC guide to IFRS has one set of formulas for discount rates, while the IASB staff paper has a set of formulas that is slightly different.
IASB has the following formulas:
Top down: risky asset yield - credit risk - liquidity risk +- timing differences
Bottom up: risk-free yield + factors relevant to insurance cash flows
PWC gives the following formulas:
Top down: reference portfolio rates +- duration mismatches - expected credit losses
Bottom up: Risk free rate + liquidity premium
Are both of these sets of formulas correct? It seems like IASB has you subtract out the liquidity risk for top down, but PWC has you add in a liquidity premium for bottom up? Do these formulas reconcile?
IASB has the following formulas:
Top down: risky asset yield - credit risk - liquidity risk +- timing differences
Bottom up: risk-free yield + factors relevant to insurance cash flows
PWC gives the following formulas:
Top down: reference portfolio rates +- duration mismatches - expected credit losses
Bottom up: Risk free rate + liquidity premium
Are both of these sets of formulas correct? It seems like IASB has you subtract out the liquidity risk for top down, but PWC has you add in a liquidity premium for bottom up? Do these formulas reconcile?
Top Down and Bottom Up discount rates
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