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)
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?
No Counter Party Deal Date Yield Buy/Sell