DearJohn why we are not taking into consideration the annal interest payments o 60000000 CHF loan , when we are calculating annual annual payments? it is not only principal that we have to pay back but also interest no? thanks

In the lectures, you swapped in full each other’s payment.

In this question however CMC only pays Y and not Y+0.8% (counter party’s payment).

You used to swap only once and transfer between the two to arrive at the end result but in this question you swapped twice to arrive at the end result.

Kindly explain as I’m really mixed up having followed the approach in the lectures.

I explain the lectures, that there are several ways of arranging the swap. How you do it does not really matter (unless obviously it is specified in the question) – it is the end result that matters.

Thanks so much John! I just checked back the lectures and you did talk about it. AFM is complex but you know how to explain so much that it makes it quite easy! You are exceptionally good! Thanks for helping me! I pray I pass to come and thank you!

Sir, regarding part C, what would be the annual interest charge to PL? 15 756 303*2% = 315 126 for every year?

Is that calculation based on the same principals as calculation for a loan from June 2015 Q3? See below:

“$30 million loan in the form of an 8% bond on which interest is payable annually, based on the loan amount outstanding at the start of each year. The bond will be repaid on the basis of fixed equal annual payments (constituting of interest and principal) over the next four years;”

Mr Moffat, just thinking on your comment on interest charge calculation. In your example, the interest charge for the second year shouldn’t it be calculated as 2% x (60M + 1.2M â€“ 15.756303M) and so on. i.e. each period closing loan balance on which interest is charged should include the accrued interest from previous periods.

do we really need to calculate this part? “Annuity factor, 4 years, 2% = 3Â·808 Equal annual amounts repayable per year = CHF60,000,000/3Â·808 = CHF15,756,303”

Becase if the cash flows are the seme for every year that we can put any number there, thougt only time period and discount rate matters…

I always have problem with this swaps questions but the way you explained is awesome. I hope I will nail this question this time. Thanks for your efforts

Thank you so much for breaking these questions down so completely! At first glance, they seem impossible, but by the time you are done with them, they are not that bad! I for one am very grateful. ðŸ™‚

It is not at all – download the paper yourself from the ACCA website.

(If you are seeing instead a Paper F9 lecture, then there is something wrong at your end – go to the support page for help, the link is below the lecture).

I really don’t understand where you are getting the numbers from because according to the question paper its yield plus 0.8% floating rate and 3.8% fixed rate.Please explain.Thank you

dosan says

DearJohn

why we are not taking into consideration the annal interest payments o 60000000 CHF loan , when we are calculating annual annual payments? it is not only principal that we have to pay back but also interest no? thanks

John Moffat says

Dividing by the annuity factor gives the interest and principal being repaid each year (15,756,303).

(If they were only repaying the principal without any interest then the repayment would have only been 60M/4 = 15M per year.)

sinn says

Hello John

Under Part C on the swap

In the lectures, you swapped in full each other’s payment.

In this question however CMC only pays Y and not Y+0.8% (counter party’s payment).

You used to swap only once and transfer between the two to arrive at the end result but in this question you swapped twice to arrive at the end result.

Kindly explain as I’m really mixed up having followed the approach in the lectures.

John Moffat says

I explain the lectures, that there are several ways of arranging the swap. How you do it does not really matter (unless obviously it is specified in the question) – it is the end result that matters.

sinn says

Thanks so much John! I just checked back the lectures and you did talk about it. AFM is complex but you know how to explain so much that it makes it quite easy! You are exceptionally good! Thanks for helping me! I pray I pass to come and thank you!

John Moffat says

Thank you for your comment ðŸ™‚

petrochina says

Sir,

regarding part C, what would be the annual interest charge to PL? 15 756 303*2% = 315 126 for every year?

Is that calculation based on the same principals as calculation for a loan from June 2015 Q3? See below:

“$30 million loan in the form of an 8% bond on which interest is payable annually, based on the loan amount outstanding at the start of each year. The bond will be repaid on the basis of fixed equal annual payments (constituting of interest and principal) over the next four years;”

John Moffat says

No. It would be 2% x 60M in the first year; in the second year it would be 2% x (60M – 15.756303M) and so on (as in June 2015 Q 3)

petrochina says

Thank you, Sir!)

aliimranacca007 says

Sir the net saving is 0.4 why you less 0.6 ?

Spiro says

Mr Moffat, just thinking on your comment on interest charge calculation. In your example, the interest charge for the second year shouldn’t it be calculated as 2% x (60M + 1.2M â€“ 15.756303M) and so on.

i.e. each period closing loan balance on which interest is charged should include the accrued interest from previous periods.

petrochina says

Sir, one more question regarding part C:

do we really need to calculate this part? “Annuity factor, 4 years, 2% = 3Â·808

Equal annual amounts repayable per year = CHF60,000,000/3Â·808 = CHF15,756,303”

Becase if the cash flows are the seme for every year that we can put any number there, thougt only time period and discount rate matters…

petrochina says

The duration will be the same, regardless of which cashflow is, untill the cashflow is constant for every year…

John Moffat says

You make a valid point, but unless you explained that in full it would be best to use the actual numbers ðŸ™‚

petrochina says

ok, thanks

John Moffat says

You are welcome, as always ðŸ™‚

manjoof1981 says

pls what makes you choose CMC own borrowing at y+0.4

John Moffat says

The only reason for having a swap is to save interest, and so it is whichever way round gives an interest saving ðŸ™‚

Dthind says

I always have problem with this swaps questions but the way you explained is awesome. I hope I will nail this question this time. Thanks for your efforts

John Moffat says

Thank you very much ðŸ™‚

John Moffat says

Proposal 1 of the question says that they can either borrow at 2.2% fixed or at yield plus 0.40%.

It is the swap that gives yield + 0.8% or 3.8% fixed.

(The free lecture on swaps may help you)

bolero05 says

Good morning Sir,

Thank you so much for breaking these questions down so completely! At first glance, they seem impossible, but by the time you are done with them, they are not that bad! I for one am very grateful. ðŸ™‚

John Moffat says

Thanks – I am pleased that you are finding them useful.

abel4444 says

Sorry the first two parts for June 2014 Paper

abel4444 says

This is an F9 – Dec 2013 Paper

John Moffat says

It is not at all – download the paper yourself from the ACCA website.

(If you are seeing instead a Paper F9 lecture, then there is something wrong at your end – go to the support page for help, the link is below the lecture).

shamie says

I really don’t understand where you are getting the numbers from because according to the question paper its yield plus 0.8% floating rate and 3.8% fixed rate.Please explain.Thank you