Parts (a) and (b) of question three asked candidates to calculate the value of bonds based on the particular yield curve and then consider how issuing a bond at a discount or a higher coupon would affect the company. In order the answer part (b) properly, candidates would have needed to calculate the coupon payable if the bond were issued at par. Part (c) asked candidates to explain four criteria used by credit rating agencies and what factors would be used to assess each category.

Question three was the most popular question but it was also the least well done of the three option questions. Most candidates did not employ the yield curve correctly in assessing the value of the bond in parts (a) and (b), or in calculating the coupon payable in part (b). This was especially disappointing given that an article on this area appeared in the Student Accountant. It is important that candidates study and fully understand the articles in the Student Accountant, so that they can apply the principles explained and discussed, to particular scenarios in questions in examinations.

The inability of most candidates to correctly employ the yield curve to calculate the prices and coupons of the bonds meant that the discussion in part (b) was little more than very superficial.