Investors Struggle with Today’s Low ~4% Risk Free Rate
¢ Pension funds & other investors look for ~8% annual returns in order to meet promised payouts.
¢ The challenge is far greater than before given: - Rising obligations relative to income - Lower interest rates
¢ Promises (e.g., pension, healthcare) made during an 8% interest rate environment are much harder to meet when the risk free rate has fallen from 8% to 3.6%. '
¢ The choice is either to reduce obligations... or
...INvest in riskier assets.
Note: 10-year Treasury coupon rate as of 2/18/2010. Source: Betsy Graseck, Morgan Stanley Research. i USA Inc. | Income Statement Drilldown 187
Rising Debt Periodic Large Level & Interest One-Time Payments Charges
Entitlement
Spending
($26B Net Profit*?)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
KP is American Recovery & Reinvestment Act programs. (@E) www.kpcb.com USA Inc. | Income Statement Drilldown 188
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