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sir in this question’s
“b)ii)Estimates the Macaulay duration of the new bond based on the interest payable annually and face value repayment, and the Macaulay duration based on the fixed annual repayment of the interest and capital, as suggested by the
CEO;”Why did we not use co.’s yield curve based on A ratings basis spread? Because the CFO clearly states the rating shift may not happen if bond’s interest and capital repayment happens in equal instalments. I mean its hard to say that we should have based our Mac D cacaultions using BBB ratings yield curve for company or A rated yield curve.
Although the examiner from his answer intended only for the CEO’s suggestion as to the repayment to be taken into account, what you say is perfectly valid.
Provided you made it clear in the report what you were assuming then you would still get the marks.
Fortunately the markers for AFM understand the subject well and that there is never just one correct answer (the examiners answer is only ever a suggested answer) – just as there is never ever a ‘perfectly correct’ recommendation in real life.
As in all AFM questions, don’t simply produce numbers, but explain what you are doing and why.
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