Major Project Specification BAFI1065 - Semester 1, 2020 (40%)

Due: Sunday 31 May, 23:59pm (the end of Week 12)

The major project is to be done individually. 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 June 2019 (last working day of the month) and the end of December 2019 (last working day of the month). The bond data can be found on the RBA website (http://www.rba.gov.au) (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 recommended as your first source of data).

Required:

Part 1: (21 Marks)

A. Calculate the dirty price, clean price, modified duration and modified convexity of the Government bonds as at the end of June 2019 and the end of December 2019. Discuss your results. (7 marks)

B. Calculate the holding period return for each of the bonds over the period from end of June 2019 to the end of December 2019. Discuss your results. (7 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 June 2019 and the end of December 2019). 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. Discuss your results. (7 marks)

(hint - the dirty prices you need for part A1 are found in an interim step in the duration calculation, no need to calculate them separately).

Part 2: (19 Marks)

A. Use all available Government bond data to construct and present a yield curve, spot curve and forward curve as at the end of June 2019 and the end of December 2019 (i.e. not just the four bonds in your portfolio, all bonds from table f16 except the indexed bonds). Your spot curve and forward curve estimation should go out no more than 5 years. Present and discuss your findings. (7 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 1 (A) with reference to this literature. Does the June 2019 forward curve appear to predict the 6 month spot rates at December 2019? Comment. (12 marks)