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Sir,
With regard to the model answer provided for question 2(b), how to calculate the Sterling Euro forward rate?
I understand that the Grabbe variant is removed from the syllabus.
You are correct – this question was set by the previous examiner, and since then the Grabbe variant has been removed from the syllabus (which is just as well because the formula that the examiner provided for it was wrong 🙂 )
Ignore this question completely.
(One of the reasons that the examiner was replaced is that his questions overall were far too difficult!)^^ okay. Yes, I find those before year 2012 are way more difficult but I thought they may be useful to deepen my understanding. So I will ignore this question.
If you allow, I wish to ask about the question 4 in the same paper, from the model answer:
1. In “Current WACC”, how to get the risk free rate for the current yield on debt, new year on debt and spread?
2. In “Combined rate”, how to get the Rd for 3 year debt and new debt?
The risk free rate comes from the graph in the question for 1 year. For 3 years he should have used about 3.75%m but he has mistakenly used 1 year which is about 3.45%.
Currently they are AA-, and the 3 year spread from the table is 40 bp (or 0.4%)
They will drop to A+ and the 3 year spread is 44bp (or 0.44%). Giving a total yield of 3.89%.For 10 years the table does give about 4.2%. Because there is a 60% chance of being A+ and a 40% chance of being A, he has taken the spread as being the weighted average of the 10 years spreads in the table.
The company currently has 500M of 3 year debt, and will raise 300M of 10 year debt (the other 80M they already have).
So for the combined, he has taken the weighted average of the two yields already calculated.
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