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 student allocation worksheet, you can find an allocated bond portfolio and an index with the bond weight of each allocated bond. In bond list worksheet, you can get the brief definition and information of the bonds and indices. Please use 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 (30 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 but without change 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 the way that 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 you have a liability payable in the time that is matching with the duration measured by the portfolio, answer the following questions: (12 marks)

- Calculate the Macaulay duration of the portfolio on 8^th May 2020. Present and discuss your findings.

- Five month later, rebalance the portfolio without changing the portfolio components. Present and discuss your results.

- 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 but you did not consider in your calculation. Use relevant literature to support your answer.