CIMA Updated F3 Exam Questions and Answers by amanda

Short-term rates slightly above long-term rates = mildly inverted yield curve.

A – This difference may reverse: Correct – the term structure can and does change over time.

B – Currency expected to strengthen long-term: Lower long-term rates imply lower expected long-term inflation, which is consistent with expectations of a stronger currency in the long run.

D – Interest rates are expected to fall: An inverted yield curve usually reflects market expectations that future short-term rates will be lower than today.

C is wrong because rates are not definite to fall, only expected to.

E is wrong: with short-term rates currently higher than long-term, a long-term borrower would not clearly “save” by borrowing short and refinancing; it also adds refinancing risk.

Sales in S$ and T$

Purchases in U$

Profit margin measured in R$

To improve or maintain operating margin in R$ terms:

You want costs in R$ to fall and/or revenues in R$ to rise.

Strengthening of the R$ against U$ means each U$ costs fewer R$, so purchase costs fall in home-currency terms → margin improves.

Weakening of customer currencies (S$ or T$) against R$ would reduce revenue in R$, harming the margin.

Weakening of the R$ against U$ would make U$ costs more expensive.

So the helpful change is: R$ strengthens against U$ → option C.

Company pays 3.5% fixed on its borrowing and enters a swap at 3.4–3.5% vs 12-month USD risk-free rate.

To move from fixed to floating, it will receive fixed 3.4% and pay floating (risk-free):

Net interest:

3.5%−3.4%+rf=rf+0.1%3.5\% - 3.4\% + \text{rf} = \text{rf} + 0.1\%3.5%−3.4%+rf=rf+0.1%

Answer to Q102: C – 12-month USD risk-free rate plus 0.1%

From the projections, the company’s interest cover remains above the required 3 times, so that covenant is satisfied. However, after paying the increased dividend (10% rise in DPS), the retained earnings for the year fall below the required $3.5 million, so the company would breach only the retained earnings covenant.