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will the element of Kaplan-Urwitz Model be expressed in the exam such as F=total assets and S=debt status(subordinated=1,otherwise=0)? or the exam just gives the model itself without expressing the elements?
Take the 12/11 exam’s Section B Q3 levante co. for example, if option 1 issue of 5% fixed coupon bond was accepeted, then in order to finance 150m, the company will have to issue 1,567,103 units of bond. Use this example to predit levante’s credit rating and use KU Model to calculate, what would be the interest charged? I found that BPP’s exercise answer calculates the interest as: 150m*5% and I just couldn’t agree with that.
Since the company issue 1567103units of bond, shouldn’t the interest be: 5%*100*1.567103?
Thank you for helping me.
Because the model is not specifically mentioned in the syllabus, then if it is ever asked again then the examiner will certainly write what the symbols mean (as he did in this question).
With regard to the interest, BPP has simply copied the examiners answer. However strictly I agree with you, in that the nominal value of the bonds issued would be $158M and therefore with a 5% coupon rate, the interest would be 5% x 158, rather than 5% x 150.
If you had done this in the exam then you would still have got full marks (but as always it shows the important of making sure your workings are clear enough for the marker to follow).
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