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CHAPTER 9

THE FINANCIAL ANALYSIS OF CASE 2
EXPOSING FRAUD

9.6.3A Truthful Financial Analysis is NEVER Presented
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Clearly, the absence of any justifiable Risk Premium differential above the 14.435% p.a. Internal Rate of Return available from the Repayment Mortgage denies any credulity to the advice given to my wife and I to choose the Endowment Mortgage because it presents the better investment return.

So too, the absence of any justifiable Risk Premium differential above the 14.641% p.a. Internal Rate of Return available from an 18 year Repayment Mortgage denies any credulity to the advice to choose the Endowment Mortgage on the basis of its Early Repayment Term.


But, it must also be crystal clear, given the volatility of Endowment Mortgage Funds (as instanced by the Standard Deviation Risk Measurements pertaining to the historical assessment of the Home-Way Mortgage Fund in Section 9.6.1), that a substantial Risk Premium would be required to compensate the borrower / investor for the Risk taken.


For example:

IF the Internal Rate of Return (IRR) available from investing in the Repayment Mortgage is 14.435% p.a., and the Risk associated with the Endowment Mortgage (as measured by the Endowment Fund’s Standard Deviation) is 7.72% p.a.,

THEN the Expected Return (i.e. the Internal Rate of Return) available from investing in the Endowment Mortgage would need to be 19.067% p.a. net to yield a Risk Premium (Reward) equal to 60% of the Risk taken (i.e. to provide a performance evaluation measurement equivalent to a Sharpe Ratio of 0.60). (See Section 7.3 : Reward for Taking Risk.)


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The assumed growth rate used in their Endowment Mortgage Quotation representations by the Life Assurance Companies should be fair and reasonable, if it complies with that specified (at the time) for such an investment product by the Life Assurance / Insurance Industry Self Regulating Organisation  —— presuming of course that such a growth rate was solely the result of a fair and reasonable objective assessment of market growth for such investment products, and not influenced by the self-interest demands of the Industry the Organisation purported to regulate.


However, even accepting that the assumed growth rate used is fair and reasonable, the conduct of the Financial Institutions (at least as far back as the late 1980’s, and probably before that), whereby the borrower / investor is induced to choose an Endowment Mortgage in preference to a Repayment Mortgage, must always be seen to be unreasonable, because ‘the proportion which the Risk bears to the Object to be attained is too great’, and was foreseeable as being so by anyone with even a basic knowledge of such matters. (See IMPORTANT NOTE! under Section 7.3: Reward for Taking Risk.)


But such conduct by the Financial Institutions mocks the boundaries of Negligence.


THE FACT IS that a truthful Financial Analysis of ANY Endowment Mortgage, on the basis of a fair and reasonable assumed growth rate, will NEVER yield an Expected Return (Internal Rate of Return) that would even remotely justify opting for an Endowment Mortgage in preference to a Repayment Mortgage.



The Reward
will NEVER justify The Risk.



This is why such a truthful Financial Analysis is NEVER presented to borrowers / investors by the Financial Institutions.


The borrower / investor can only be induced to choose an Endowment Mortgage by deceptive means.



The Financial Institutions must resort to Fraud.

 

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