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Assessment 3 Specification BAFI1065 – Semester 1, 2021 (50%) (Maximum of 12 pages submitted, not including appendices) Due: Sunday 13th June 2021, 11:59 pm (Week 14) Assessment 3 is an individual project. Each student has a set of five Australian government/corporate bonds and a bond index. See the excel file “Australian corporate bond list.xlsx” of the selected bonds and indices. Under the “student allocation” worksheet, you can find an allocated bond portfolio and an index with the bond weight of each allocated bond. In the “bond list” worksheet, you can get a brief definition and information of the bonds and indices. Please use the search code to get the relevant information in Eikon. Required: Part 1: (10 marks) A. Describe the shape and level of the current Yield Curve in Australian Commonwealth Government Securities (i.e., at the time you decide to answer this question – use data gathered from Eikon 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 opinion on Interest Rates in Australia for the following time horizons: ● Six months ● Twelve months (6 marks) B. Describe the shape and level of the bond based zero-coupon curve in Australian Commonwealth Government Securities. Compare the current yield curve and the zero-coupon curve and Comment on the relationship between the two yield curves. (4 marks) Part 2: Dealing Simulation (40 marks) A. Based on a set of five government/corporate bonds and the benchmark index, calculate the annualized tracking error of the portfolio (i.e., at the time you decide to answer this question, get the monthly returns of one year). Present and discuss your findings. (5 marks) B. Suppose you would like to match the benchmark index without changing the portfolio components, what would you do? Answer the same question if you want to change the portfolio components. (5 marks) C. Review the usefulness of the tracking error method with a comprehensive reference to the relevant academic literature. Discuss how you have estimated in Part 2(A) and (B) regarding this literature. Also, comment on the pros and cons of using this method. (8 marks) D. Suppose your company have a liability payable that would like to match with the duration measured by the portfolio, answer the following questions: (12 marks) – This liability is due in 5 years (the basement date is 31st Dec 2020). Calculate the Macaulay duration of the portfolio based on the weights assigned from the excel file. Does the portfolio match with the liability? If not, how to change the portfolio weight to match with this liability? Present and discuss the findings. – If you would like to rebalance the portfolio by using other bonds, what would you do? Discuss the immunization method by using the bond list provided by the excel file. – Discuss the factors that may influence the immunization result. Comment on the pros and cons of using this method. Use relevant literature to support the answer. E. Use traditional ratio analysis (i.e., interest coverage, leverage, cash flow, net assets, and working capital) to evaluate the bonds’ financial risk. Evaluate the bonds’ credit quality. Comment on the pros and cons of the ratio analysis. Any other ratios that should be considered when evaluating the bond credit rating? Use relevant literature to support the answer. (10 marks)

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