SM bonds - a new product for managing longevity risk

Research output: Contribution to journalArticleResearchpeer-review

Abstract

A new type of retirement bond is proposed called an SM bond. SM bonds are long dated government bonds divisible into two parts: a survivorship (S) part and a mortality (M) part. Each SM bond is associated with a particular age. SM bonds associated with a particular age are only purchasable by (originators) of that age. The SM bond is then splittable into an S and M component. The S part must be retained by the originator, who receives the face value of the bond if he/she is alive at maturity. For originators who die prior to the maturity date, the maturity value of the SM bond is assigned to a mortality pool. The holder of the M part of the bond receives the annual bond coupon, and at maturity a pro rata share of the mortality pool. M bonds are tradable: holders can sell their M bonds to anyone, at any time. It is envisaged different age bonds are issued every year for ages say 30-64 each with say a 35-year term. The market will be regularly informed about the mortality experience, and the market price of the M bonds will vary over time to reflect that experience.

LanguageEnglish
Pages121-149
Number of pages29
JournalJournal of Risk and Insurance
Volume86
Issue number1
Early online date22 Feb 2017
DOIs
Publication statusPublished - Mar 2019

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New products
Longevity risk
Maturity
Mortality
Market price
Government bonds
Coupons
Retirement

Cite this

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title = "SM bonds - a new product for managing longevity risk",
abstract = "A new type of retirement bond is proposed called an SM bond. SM bonds are long dated government bonds divisible into two parts: a survivorship (S) part and a mortality (M) part. Each SM bond is associated with a particular age. SM bonds associated with a particular age are only purchasable by (originators) of that age. The SM bond is then splittable into an S and M component. The S part must be retained by the originator, who receives the face value of the bond if he/she is alive at maturity. For originators who die prior to the maturity date, the maturity value of the SM bond is assigned to a mortality pool. The holder of the M part of the bond receives the annual bond coupon, and at maturity a pro rata share of the mortality pool. M bonds are tradable: holders can sell their M bonds to anyone, at any time. It is envisaged different age bonds are issued every year for ages say 30-64 each with say a 35-year term. The market will be regularly informed about the mortality experience, and the market price of the M bonds will vary over time to reflect that experience.",
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SM bonds - a new product for managing longevity risk. / de Jong, Piet; Ferris, Shauna.

In: Journal of Risk and Insurance, Vol. 86, No. 1, 03.2019, p. 121-149.

Research output: Contribution to journalArticleResearchpeer-review

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