Sembilan (june 12 Q20

They are swapping and will pay fixed interest of 3.76 1/4% per year on the $320M and in return will receive floating interest at whatever the spot rates are each year. The examiner has been a bit unfair in using almost the same terms twice - the 'spot yield curve rates' that he gives are the current fixed rates per year for borrowing for 1, 2, 3 or 4 years. The receipts from the bank will be at 'current yield curve rates' which sounds like the same thing, but actually mean the interest rates that will actually occur each year. Obviously we don't know what the floating rate will be in future years, which is why we have had to use the forward rates as the best estimate of what the future interest rates will be. Again, it was a bit unfair of him to use the wording that he did, but I hope that makes sense and answers your question.

Thank you so much John. U make it so simple:-)

You are welcome :-) (and thank you!)

Sir, how do we know 3.8% represents 0 xoupon bond? what are we trying to do in part a?

In part (a) Sembilan will be paying a fixed 3.7625% each year and receiving variable interest based on the yield curve rate. So what is required is to calculate what the net receipt or payment will be each year if they do this swap. The following article on the ACCA website explains well what is happening and the approach to take: https://www.accaglobal.com/ubcs/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/interest-rate-swap-valuation.html