2. INTRODUCTION
A cashflow model is a mathematical projection of
the payments arising from a financial transaction.
Payments received = income = positive cashflows
Payments made = outgo = negative cashflows
The difference at a single point in time is called the
net cashflow.
3. CASHFLOW MATCHING
Providers deliver benefits through the
investment of assets.
A key decision for the provider is whether or not
to invest in such a way that the expected
cashflows from the asset held match the
expected cashflows from the liabilities.
If the decision is taken not to match then
additional capital will need to be held to cover
the possibility that there are insufficient asset to
meet the liabilities when they fall due
4. CASHFLOW PROCESS
Cashflows are sums of money which are paid or
received at different times.
Timing and amount of the cashflows may be
known or unknown.
In some businesses, such as insurance
companies, positive cashflows are received
before negative cashflows.
Where there is uncertainty about the amount or
timing of cashflows, assign probabilities to both
the amount and the existence of a cashflow.
6. AN ANNUITY
An annuity provides a series of regular payments in return
for a single premium.
For an immediate annuity payments are made as long as
the annuitant is alive.
The cash flow for the investor
initial negative cashflow
followed by a series of smaller regular positive cashflows.
The cashflow for the annuity provider
initial positive cashflow
followed by an unknown number of regular known negative
cashflows.
The number of future negative cashflows depends on the
probability of the policyholder.
7. TERM ASSURANCE
A term assurance provides a lumpsum on the death
of the policyholder provided that this occurs during
the term of the policy.
It is usually purchased by a series of annual
premiums ,generally of constant amount.
For the provider
There will be an unknown number of regular known
positive cashflows
Followed by either a negative cashflow of known amount
but uncertain timing or
No negative cash flow
8. ENDOWMENT ASSURANCE
There will be a negative cashflow for the
provider at the maturity date of the contract,if
the sum assured has not already been paid
on earlier death.
Combination of term assurance and pure
endowment assurance
9. AN INTEREST –ONLY LOAN
An interest only loan is repayable by a
series of interest payments followed by a
return of the initial loan amount.
The cashflows are the reverse of those for
fixed interest security.
The interest rate need not be fixed in
advance .The regular cashflows may
therefore be of uknown amounts.
10. A REPAYMENT LOAN
A repayment loan is repayable by a series of
amounts each of which includes partial
repayment of the loan capital in addition to
the interest payment.
The cashflows are similar to those for an
annuity certain.
11. MOTOR INSURANCE
A motor insurance policy will provide cover
for a period of one year.
In return for a premium received at the start
of the start of the year, or on a regular basis,
an insurance company will accept the
financial risk which are associated with the
policyholders motoring
