Two items today. A friend of Eumaeus from Ireland writes to say they are disappointed that we did not cover the Jeffery and Smith paper (Equity Release Mortgages: Irish & UK Experience) as extensively as we might have done. Another friend wrote to express a puzzle about the Matching Adjustment principle. The principle suggests that we can construct a synthetic non-sovereign bond rate that is risk free, but which has a higher return than a (risk free) gilt, which we can use to discount the future liability. But if the gilt and the synthetic bond are certain to pay the same amount at maturity, how can their returns differ?
Continue reading “From the postbag – the illiquidity premium”