BAFI1065 Money Market and Fixed Income Statement

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Assessment 2 is an individual project. Each student will choose a set of four Australian Commonwealth Government Securities (not the indexed bond). Collect the key characteristics of each of the bonds (coupon rate, maturity date) and bond yield data as of the end of June 2022 (last working day of the month) and the end of December 2022 (last working day of the month). The RBA website (http://www.rba.gov.au) provides the bond data (you will have to explore the site to find and understand what you are looking for – this is part of your task, RBA Table F16 is your first source of data).

Required:

Part 1: (17 Marks)

  1. Calculate the dirty price, clean price, modified duration, and convexity of the Government bonds at the end of June 2022 and December 2022. Discuss your results. (6 marks)
  2. Calculate the holding period return from the end of June 2022 to the end of December 2022 in each bond. Discuss your results. (4 marks)
  3. Calculate the modified duration and convexity for an equally-weighted portfolio of the four bonds at both dates. Estimate the holding period return for the portfolio over the six months 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. Discuss your results. (7 marks)

Part 2: (18 Marks)

  1. Use all available Government bond data to construct and present a yield, spot, and forward curve at the end of June 2022 and December 2022. Estimate the spot curve and forward curve for 5 years. Present and discuss your findings. (7 marks)
  2. Review the yield, spot, and forward curves' predictive ability with a comprehensive reference to the relevant academic literature. Discuss the curves you have estimated in Part 2 (A) regarding this literature. Consider the COVID-19 pandemic issue and other recent significant events. Does the June 2022 forward curve predict the six-month spot rates in December 2022? Comment and explain. (11 marks)

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