Present Value of $100,000 under CLICO bailout plan

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The new proposals for refunds of amounts over $75,000 are that those will be repaid in equal annual payments over a 20-year period, via zero-interest bonds.

Claimants can either wait 20 years or, if they need money right now, sell their right to receive these future sums of money at a discount.  The future value of money is lower than its present value a long-time truth made powerful by the force of inflation and the threat of devaluation – the effect being that this lower value of future sums of money is shown in the discount rate applied to the right to receive these sums.

There is no way to know for sure exactly what/how the various negotiations will play out between the claimants and the people they are seeking to sell their bonds to.  There is a widespread belief that the discount rates will match the rates at which bonds are floated and that view has merit.

These are some specimen calculations for the benefit of our readers:

Notional Sum is $100,000 payable over 20 years at zero interest
Discount Rate Present Value
4% $67,952
5% $62,310
6% $57,349
7% $52,968
8% $49,090
9% $45,642
10% $42,568
15% $31,296

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3 thoughts on “Present Value of $100,000 under CLICO bailout plan

  1. Afra,

    Happy Easter to you sir.

    I am having 2 problems following your numbers.
    1. I am unable to replicate the above numbers. Can you please shed some light on any, e.g. 4%, $67,952?

    2. Having said that, aren’t the cash flows more representative of an annuity over 20 years, instead of a lump sum? If so then the present values will be different because the earlier cash flows will be higher than the later ones due to timing.

    I certainly agree with your main contention though.

    Kind Regards,
    Clive

    1. Hi Clive,

      The process is one of simply discounting each annual payment of $5,000 by the stated rate.

      It can be done ‘manually’ and year-by-year, or by using the Fx ‘function’ key in Excel and entering the formula as 4%:20 periods (years); $5,000 as the annual sum payable.

      Yes, the cash payout does decline in each successive year.

      Thanks

      Afra

      1. Afra,

        Thanks a lot for your reply. Silly me. It never occurred to me that you annuitised the $100,000.00 and discounted accordingly. I got the impression that it was a lump sum discounted over 20 years. My mistake!
        Appreciate the clarity.

        Keep up your admirable work!

        Regards,
        Clive

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