Chapter 16 - Unit Pricing

Question 1

What is the internal unit linked fund?

Answer 1

It consists of clearly identifiable set of assets for example equities, property and deposits. The fund is divided into an equal number of units consisting of identical sub-sets of the funds assets and liabilities

Question 2

Main risks to the company for maintaining a management box: (3)

Answer 2

• Risk that the value of the underlying assets goes down, so the value of the units that the company is holding for its own account decreases
• Also the risk that the expenses of managing the box is higher than expected
• There are operational risks, keeping track of which units belong to PH and which to the company

Question 3

The basic equity principle of unit pricing for an internal fund:

Answer 3

The interest of unit-holders not involved in a unit transaction should be unaffected by that transaction

(Main principle in unit pricing)

Question 4

What is the appropriation price:

Answer 4

The price at which a company will create a unit.

It is the amount of money that the company should put into the fund in respect of each unit it creates on order to preserve the interest of the existing unit holders

Question 5

What is the expropriation price?

Answer 5

The price at which the company will cancel units.

It is the amount of money that it should take out of the fund in respect of each unit it cancels in order to preserve the interest of continuing unit-holders

Question 6

Appropriation price can be calculated as: (5)

Answer 6

1. The market ‘offer’ price’ value of the assets held by the fund plus the expenses that would be incurred in the purchase
2. Plus the value of any current assets
3. Less the value of any current liabilities
4. Plus any accrued income, such as interest
5. Less any allowance for accrued tax, if applicable
6. Divide by the number of units existing at valuation date will gove appropriation price

Question 7

What is the bid value of assets?

Answer 7

The value of the assets held by the fund if they were to be sold

Question 8

Formulae for appropriation price:

Answer 8

( Market offer price value of assets + expenses) / number of units

Question 9

Formula for expropriation price:

Answer 9

( Market bid value of assets - expenses ) / number of units

Question 10

Errors that may affect unit pricing: (6)

Answer 10

1. Not changing the pricing basis when the flower for the portfolio changes dierction
2. Incorrectly allowing for taxation in the unit pricing process
3. Using incorrect bid/offer spread
4. Errors in pricing of the assets
5. Inaccurate/outdated current assets and current liability values
6. System malfunction or breakdowns resulting in delays available in pricing