Assessment 2 Specification BAFI1065 Semester 2, 2020 (40%) (Maximum of 12 pages submitted, not including appendices) Due: Friday 2nd October, 11:59 pm (the end of Week 10) Assessment 2 is an individual project. Each student will choose a set of four 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 January 2020 (last working day of the month) and the end of July 2020 (last working day of the month). RBA website (http://www.rba.gov.au) provides the bond data (you will have to do some exploration of 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: (20 Marks) A. Calculate the dirty price, clean price, modified duration and modified convexity of the Government bonds as at the end of January 2020 and the end of July 2020. Discuss your results. (7 marks) B. Calculate the holding period return in each bond. Discuss your results. (5 marks) C. Calculate the modified duration and modified convexity for an equally-weighted portfolio of the four bonds (25% weight for each bond) at both dates (that is, both at the end of January 2020 and the end of July 2020). 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. (8 marks) Part 2: (20 Marks) A. Construct and present a yield curve, spot curve and forward curve as at the end of January 2020 and the end of July 2020. Consider the government bond information on the RBA website. Your spot curve and forward curve estimation should go out no more than five years. Present and discuss your findings. (8 marks) B. Review the predictive ability of the yield, spot and forward curves with the comprehensive reference to the relevant academic literature. Discuss the curves that you have estimated in Part 2 (A) regarding this literature. Consider the current COVID-19 pandemic issue, does the January 2020 forward curve appear to predict the six-month spot rates in July 2020? Comment. (12 marks)