25721 Investment Management Assignment
Part II - Worth 20%
Autumn 2024
Assessment Task
Part II of the assignment is designed to mimic actual tasks of a bond portfolio fund manager. It can be completed by a group of up to 3 students. All group members will receive the same mark. You can do the Assignment as an individual (that is a 1 student group). Assignments submitted by a group of more than 3 students will be given a zero mark. In Part II you will complete four questions on the bond market. You need to provide explanations and discussion of your work and answers.
• Data Description - The data to be used in the Assignment is in the EXCEL worksheet titled A24AssignmentPart2Data.xlsx. The worksheet contains (i) the coupon rate and maturity for twenty (20) semi-annual Treasury bonds; and (ii) zero-coupon yields (ZCYs) with different maturities. Note that the ZCYs are expressed per annum (p.a.).
• EXCEL Calculations – Your group should download from Canvas the EXCEL spreadsheet examples in Topic 7 and Topic 8 on calculating bond prices, YTM and duration. Revise these examples before starting the Assignment calculations.
Submission Requirements
Due date – A softcopy of your group’s Assignment and EXCEL spreadsheet showing your calculations must be submitted online on Canvas by 11.59pm Friday 3rd May 2024.
• Your assignment will only be marked if the cover sheet (available on Canvas) is attached to the front of the Assignment and each group member’s student number, name and handwritten signature are on the cover sheet.
• Late submissions will not be accepted.
Format – The answers to the four questions, including all text, tables and figures should be on A4 paper with a minimum font size of 12. The number of pages, excluding the cover sheet, reference list and pages with graphs/diagrams, should not exceed 10 pages in length.
• The Assignment must be in Word file format.
• Post questions on “Discussions” in Canvas. Note that email is not an efficient way for asking questions about the assignment. You can also arrange a Zoom consultation with your lecturer.
• If any parts of your assignment are found to not be your own work or contain sentences that are identical or similar to those in assignments submitted by other students; on a solution or feedback sheet provided to students in a previous semester; or copied from a source and not correctly referenced, a breach of Student Rule 16.2.1(1) http://www.gsu.uts.edu.au/rules/student/section- 16.html) will have occurred.
This breach will be reported to the University as Academic Misconduct and you will receive a mark of zero for the assignment.
Question 1: Semi-Government Bonds - 5 marks (3 marks for content and 2 marks for expression)
The size of the Australian Semi-government bond market increased significantly during the COVID-19 pandemic. Explain, in your own words, whether you would prefer to invest in Australian Semi-government bonds or Australian Government bonds.
Note: The only references that you can use to answer this question are: (i) Batchelor, S., and Roberts, M, (2024) “Recent Developments in the Semi-government Bond Market”, Reserve Bank Bulletin, January, pp. 51-58; (ii) Information on Australian Government Bonds available on www.aofm.gov.auand www.rba.gov.au; (iii) Lecture slides and (iv) the textbook Bodie, Z., Kane, A., and Marcus A.J, 2022, Essentials of Investments, 12th edition, McGraw-Hill Education.
Question 2: ZCB Yields and Bond Prices - 5 marks (3 marks for content and 2 marks for expression)
Data is available in A24AssignmentPart2Data.xlsx to calculate the price and yield to maturity of twenty (20) Australian Treasury Bonds. (i) Your calculations must be reported in a table under the headings Treasury Bond Code, bond price, bond yield to maturity, maturity date and coupon rate. (ii) Choose one of the bonds that has a maturity greater than two years and explain, in your own words, and show how you calculated the price and yield to maturity of this bond.
.
Note: Use the data in the EXCEL spreadsheet A24AssignmentPart2Data.xlsx. In EXCEL the formula functions IRR and RATE can be used to calculate YTM. A financial calculator can also be used to calculate YTM.
Question 3: Term structure and Forward Yields - 5 marks (3 marks for content and 2 marks for expression)
Forward yields are based on the yields of zero-coupon bonds. Use the data in A24AssignmentPart2Data.xlsx to estimate the forward yields out of 4 years ( f4 to 4.5 ; f4 to 5; … ; f4 to 10) and 6 years (f6 to 6.5 ; f6 to 7; … ; f6 to 10). (i) In a table, list the zero-coupon bonds yields and forward yields. (ii) Plot the zero-coupon bond yield curve and the two forward yield curves on the same graph. The yields will be on the vertical axis and the terms on the horizontal axis. (iii) Explain, in your own words, how forward yields can be used to explain the shape of a yield curve.
Question 4: Bond Portfolio - 5 marks (3 marks for content and 2 marks for expression)
Your group has $1,600,000 and decides to invest the money in a bond portfolio that has a modified duration of 3.5 years and is made up of only two of the bonds from the EXCEL spreadsheet A24AssignmentPart2Data.xlsx. (i) Calculate and show in a table the duration and modified duration for all twenty Treasury Bonds. (ii) Estimate how much of the $1,600,000 your group will invest in the two bonds included in the group’s bond portfolio. Show each step of your calculations (iii) Explain, in your own words, how your group will maintain the bond portfolio’s modified duration at 3.5 years when interest rates decrease.
Deductions from the Final Mark - One mark will be deducted from the final mark if a reference list is not provided on the last page of the Assignment.