
#1




12/31/01 YC
1Yr 2.03 5Yr 4.41 1/2 the 5 yr 2.20 From Reg126 For the scenarios in paragraph (1) and otherscenarios which may be used, projected interest rates for a 5 yr treasury note need not be reduced beyond the point where the 5 year treas note yield would be at 50% of its original level. What is the minimum 1yr rate. 
#2




I thought that all yield curve points were subject to the 50% minimum. This may not be explicitly stated in Reg 126, but it's the "standard procedure" that I remember from my cash flow testing days.
Any folks working for NYdomiciled/licensed companies want to jump in on this one? 
#3




I use 50% of current curve as a floor at each point in the curve for the NY scenarios. Make sure your inflation assumptions are consistent with the resulting curve, as well.
I donīt have a published reference for you, but a couple of other actuaries have recommended it to me, so it is probably accepted practice. If you are the Appointed Actuary and will be signing off on this (my situation is a little easier, since my company is not subject to the NY regs) why not call the NY department or even the Actuarial Standards Board of the AAA and ask "is this acceptable practice"? 
#4




The reg would have said take 50% of the entire Treasury curve as the floor if that is what was wanted. However, in effect it says move the yield curve down until the 5 yr Treasury is at 50% of its initial value and shift the rest of the yield curve accordingly. In this deterministic test, you are not supposed to be changing the slope of the treasury curve (esp in NY).
Here is another way to look at it. The pop down is a 300 bps parallel shift. The reg is says that if 50% of the 5 yr Treas is less than 300 bps, use it. So this year the pop down is a 215 bps shift. Likewise decreasing goes down 50bps a year until a 215 bps drop and the cup goes down 100 bps a year until a 215 bps drop, not 500 bps. If you want to argue, for example, that 1 year treasuries would never drop below 50% of their current level, that is a separate matter. But as the test is spelled out, one year Treasuries will be at zero in the popdown scenario. (Yes I have "arbitrarily" not let the interest rate become negative.) 
#5




Oldtimer... I think your parenthetical statement at the end is why many people apply the 50% limit all along the curve. If we really want a 215 bp parallel shift, why put a floor at zero?
For practical reasons, of course. The probability that nominal interest rates will be below zero is probably below zero as well (people would simply hold cash which is a US note with a 0% interest rate). The counter argument is that the NY scenarios are not meant to be realistic possibilities, they are stress tests and therefore we should follow the text of the law literally. However, once we accept the concept that the stress test should have some bounds of practicality, we could conclude that if a 50% limit at 5 years is a reasonable limit, and approved by the regs, then applying that 50% limit along the curve is also reasonable. 
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