Question 1

Choose a set of four on-the-run 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 December 2016 (last working day of the month) and the end of June 2017 (last working day of the month). The bond data can be found on the RBA website (http://www.rba.gov.au(Links to an external site.)) (RBA Table F16 is recommended as your first source of data).

a.Calculate the dirty price, clean price, modified duration and modified convexity of the Government bonds as at the end of December 2016 and the end of June 2017. Discuss your results.

b.Calculate the holding period return for each of the bonds over the period from December 2016 to the end of June 2017. Discuss your results.

c.Calculate the modified duration, modified convexity for an equally-weighted portfolio of the bonds at both dates and 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 to the separate bonds at both dates. Discuss your results.

d.Use all available Government bond data from the RBA website (i.e. not just the 4 bonds in your portfolio) to construct and present a yield curve, spot curve and forward curve as at the end of December 2016 and the end of June 2017. Your spot curve and forward curve estimation should go out no more than 5 years. Present and discuss your findings.

e.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 4 with reference to this literature. Does the December 2016 forward curve appear to predict the 6 month spot rates at June 2017? Comment.