choose a set of four on-the-run Australian Commonwealth Government Securities. Collect the key
characteristics of each of the bonds (coupon rate, maturity date) and bond yield data
as at the end of June 2014 (last working day) and the end of December 2014 (last
working day). The bond data can be found on the RBA website
(http://www.rba.gov.au) (you will have to do some exploration of the site to find and
understand what you are looking for).
Required:
Part 1: (15 Marks)
A. Calculate the dirty price, clean price, modified duration and modified
convexity of the Government bonds as at the end of June 2014 and the end of
December 2014. (5 marks)
B. Calculate the holding period return for each of the bonds over the period from
the end of June 2014 to the end of December 2014. (5 marks)
C. Calculate the modified duration, modified convexity for an equally-weighted
portfolio of the bonds at both dates and estimate the holding period return for
the portfolio over the 6-month period between the two dates. Report on your
findings. Compare and contrast the return and volatility of the portfolio and
the separate bonds at both dates. (5 marks)
(hint – the dirty prices you need for part A are found in an interim step in the
duration calculation, no need to calculate them separately).
Part 2: (15 Marks)
A. Use ALL available Government bond data (i.e. not just the bonds in your
portfolio) to construct and present a yield curve, spot curve and forward curve
as at the end of June 2014 and the end of December 2014. Your spot curve and
forward curve estimation should go out no more than 5 years. Present and
discuss your findings. (5 marks)
B. Review the predictive ability of the yield, spot and forward curves with
comprehensive reference to the relevant academic literature. Discuss the
curves that you have estimated in Part 2A with reference to this literature.
Does the June 2014 forward curve appear to predict the 6 month spot rates at
December 2014? Comment. (10 marks)BAFI 1065 – 2015 Page 8 of 11
Part 3: (10 marks)
Dealing Simulation Report
Requirements:
A: (4 Marks)
Describe the shape and level of the current Yield Curve in Australian Commonwealth
Government Securities (ie: at the time of your dealing sessions – use data gathered
from the trading system in the FMTS, plot the curve and discuss it).
Comment on its implications for Fixed-Interest fund managers.
Based on your view of the yield curve, and other sources, what is your view on
Interest Rates in Australia for the following time horizons:
6 Months
12 Months
B: (4 Marks)
With respect to your trading portfolio:
1. Report on your Portfolio composition in Market Value Terms and Face Value
Terms:
(a) At the commencement of trading
(b) After Dealing Session 2
2. What is the level of interest rate risk in your portfolio, as measured by:
(a) Portfolio Modified Duration at the commencement of trading
(b) Portfolio Modified Duration after Dealing Session 2
3. How has the interest rate risk profile of your portfolio changed? What are the
implications for your portfolio in the current yield curve environment?
4. Comment on whether you achieved your set objectives with regard to interest rate
risk:
If you achieved your objective, what trading actions/strategy contributed to your
success?
If you did not achieve your objective, what would you do differently?
Was your trading consistent with the market view developed in Part 2?
C: (2 marks)
Compare and contrast your performance from one dealing session to another. Discuss
what you could do to improve future dealing sessions. What lessons did you learn and
how did you perform as a team?
Further Requirements:
You will need to submit your project to Turnitin via the link in the Assignments
folder on Blackboard (one submission per group). You will also need to submit a hard
copy of your assignment with a cover sheet to the Assignment Box on level 7
(Economics, Finance and Marketing) by Wednesday, 22 October. In order to achieve
a passing grade your submission should at least be technically accurate throughout. BAFI 1065 – 2015 Page 9 of 11
Your submission should be in report format with results of Part A summarised and
discussed in an appropriate manner and all workings shown in technical appendices.
You should also include a soft copy of all workings on CD-R/DVD-R/USB. Part B is
a research and analysis task and appropriate referencing and presentation must be
used in accordance with RMIT’s guidelines for the presentation and submission of
written work, as indicated on page 4 of this guide. These are minimum requirements
and failure to comply may mean that your submission does not meet the basic
requirements for a passing grade.
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