 This topic has 6 replies, 2 voices, and was last updated 4 years ago by John Moffat.

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July 26, 2018 at 2:27 pm #464751fahad132
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Dear Sir,
I have problem with part(b) of this question regarding the solution in BBP kit.
66 Sembilan Co (6/12, amended) 49 mins
Sembilan Co, a listed company, recently issued debt finance to acquire assets in order to increase its activity levels.
This debt finance is in the form of a floating rate bond, with a face value of $320 million, redeemable in four years.
The bond interest, payable annually, is based on the spot yield curve plus 60 basis points. The next annual payment
is due at the end of year one.Sembilan Co is concerned that the expected rise in interest rates over the coming few years would make it
increasingly difficult to pay the interest due. It is therefore proposing to either swap the floating rate interest
payment to a fixed rate payment, or to raise new equity capital and use that to pay off the floating rate bond. The
new equity capital would either be issued as rights to the existing shareholders or as shares to new shareholders.
Ratus Bank has offered Sembilan Co an interest rate swap, whereby Sembilan Co would pay Ratus Bank interest
based on an equivalent fixed annual rate of 3.76¼% in exchange for receiving a variable amount based on the
current yield curve rate. Payments and receipts will be made at the end of each year, for the next four years. Ratus
Bank will charge an annual fee of 20 basis points if the swap is agreed and will also guarantee the swap. The current
annual spot yield curve rates are as follows:
Year One Two Three Four
Rate 2.5% 3.1% 3.5% 3.8%
The current annual forward rates for years two, three and four are as follows:
Year Two Three Four
Rate 3.7% 4.3% 4.7%Required:
(b) (i) Demonstrate that Sembilan Co’s interest payment liability does not change, after it has undertaken
the swap, whether the interest rates increase or decrease. (5 marks)July 26, 2018 at 4:52 pm #464773John MoffatKeymaster Topics: 57
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Please do not type out full questions like this – they are copyright of the ACCA and BPP pay to reprint them, but we do not and the ACCA get annoyed 🙂
I have the BPP Revision Kit and I have all past ACCA exam questions, so all you need to do it give the name of the question.With regard to part (b), the ‘% impact’ column is simply listing what you are told in the question. The question asks you to demonstrate that the total interest does not change whether interest rates increase or decrease. For this you can use any two interest rates (so long as one higher and one lower) – the examiner has chosen 3% and 4%.
If you are not clear where any of the numbers come from in the 3% and 4% columns, then say which ones and I will show the calculation.
July 28, 2018 at 11:28 am #465009fahad132 Topics: 32
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Yes Sir , Sorry about to post the whole question , i didn’t know about it.
Can you please tell me how we will arrive at the calculation by using these rates ,
these rates i kn0w that has been randomly pick up by the examiner , but the further calculation in these column i didn’t understand , i was trying to use your techniques of swap
which i have learnt during the course but i failed to answer , i have spent hour on it.July 28, 2018 at 3:22 pm #465055John MoffatKeymaster Topics: 57
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I will show the workings for a yield of 3%:
Sembilan is borrowing $320M.
They pay floating rate at 3.60%: $320M x 3.60% = (11.52M)
According to the instruction in the question,
they pay Rates bank at 3.7625%: $320M x 3.7625% = (12.04M)
and they receive from Ratus the yield rate of 3%: $320M x 3% = 9.6M
They pay a fee of 0.20%: $320M x 0.20% = (0.64M)The total net payment = 11.52 + 12.04 – 9.6 + 0.64 = $14.6M
If you repeat the workings with a yield of 4% you will end up with the same net payment.
July 28, 2018 at 8:39 pm #465084fahad132 Topics: 32
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Thank you very much Sir , it helped me alot
I passed F9 by using your lectures in first attempt and hoping to pass this subject too.July 28, 2018 at 8:50 pm #465086fahad132 Topics: 32
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I will be much more likely to ask question due to i am self studying and using OT notes , i will ask the stuff which will look more scary to me.
July 29, 2018 at 10:55 am #465117John MoffatKeymaster Topics: 57
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You are welcome 🙂

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