Task 1 (45 marks). The following Bloomberg screen presents BHP Billiton fixed-income security for you to evalute. In the first task of your assignment, answer the following questions. Figure 1. Bloomberg screen for a BHP Billiton fixed-income security. 1) Provide a brief description of the security, including a) type of the security, b) maturity date, c) coupon rate and frequency, d) seniority ranking, e) credit rating, f) spread at issue, and g) par value. (3.5 marks)

2) Calculate the above securitys full price, clean price and accrued interest as of the date of the screen (12 Aug 2016) using the yield to maturity (bid yield) as listed on the screen. Show calculations. (6 marks)

For Questions 3-11, assume today is 30 Sep 2016 and make appropriate estimation using this assumption. 3) Current (annualised) US Treasury spot rates are as follows: 6 months 1 year 18 months 2 year 0.4% 0.5% 0.6% 0.66% Assuming that Z-spread is equal to 55 basis points, calculate the bonds arbitrage free price. Show calculations. (3 marks)

4) If the bond is bought today at the arbitrage-free price and sold on 30 Sep 2017 at $101.10, what will be realised rate of return on bond. Show calculations. (3 marks)

5) From the US treasury spot rates above and assuming Z-spread of 55 basis points, calculate spot rates for this bond. Show calculations. (3 marks)

6) Using the bond-specific spot rates you have just calculated in Question 5, derive six-monthly forward rates, including six-months forward rate 6 month from now (0.5f0.5), six-month forward rate 12 months from now (1f0.5), and six-months forward rate 18 months from now (1.5f0.5) for the bond. Show calculations. (4.5 marks)

7) Estimate the bonds arbitrage free price using forward rates calculated in Question 6 and comment on comparability of spot rate and forward rate pricing. Show calculations. (4 marks)

8) There is another BHP Billiton 2.5 year semi-annual 2% coupon-paying bond in the market priced at $100.85. Using the bond-specific spot rates as calculated in Question 5 (for 0.5 year, 1 year, 1.5 year and 2 years), bootstrap 2.5-year spot rate for the bond. Show calculations. (3 marks)

9) Estimate the original bonds (displayed in Figure 1) Macaulay Duration and Convexity. Show calculations. (6 marks) Hint: for semiannual coupon paying bonds you will be using the semiannual cash flows, yields and periods as inputs for your calculation of the Macaulay Duration and Convexity. You will need to convert the output of your calculations into the annualised (standard) form. To do that you should divide Macaulay Duration and Convexity based on the semiannual periods by 2 and 4 respectively to arrive with the final answer.

10) Estimate the original bonds (displayed in Figure 1) Approximate Modified Duration and Approximate Convexity by applying 12bp interest rate shock to annualised yield to maturity. Show calculations. (4 marks)

11) Assume the following interest rate tree (5 marks): 2.18% 1.82% 1.34% 1.62% 0.95% 1.35% 0.99% 1.20% 1.00% 0.89% Current 6-month rate 6 months 12 months 18 months a) Calculate value of the (option-free) bond using binomial model. b) Assume the bond is callable on 30 Sep 2017 and 30 Mar 2018 at $100.40, calculate the value of the bond. c) Calculate value of the call option and comment on who bears the cost of the call option. Task 2 (18 marks). You are provided with BHP Billiton financial statements (in a separate file), including Income statement, Balance sheet and Cash flow statement.

12) Use the statements to calculate the following measures for five financial years (2012-2016) (10 marks): a) EBITDA b) FFO c) FCF before dividends d) FCF after dividends e) Debt/capital f) Debt/EBITDA g) FFO/debt h) FCF after dividends/debt i) EBITDA/interest expense j) EBIT/interest expense.

13) Based on the calculated measures, discuss BHP Billitons (8 marks) a) Profitability and cash flows b) Leverage c) Coverage Task 3 (7 marks). Consider a pool of 800 mortgages with the average size being $500 thousands, which is expected to be paid off in 25 years with fortnightly frequency (26 payments per year). The annual mortgage interest is 5%.

14) Estimate the value of fortnightly mortgage payments from the pool (2 marks). 15) Suppose that the servicing fee is 0.6%, fill in the following table (5 marks). Fortnight Beginning mortgage pool Mortgage pool payment Servicing fee Net interest Scheduled principal repayment End of fortnight balance 1 2 3 4 5 6 7 8 9 10 In your assignment, up to 30 additional marks can be achieved by addressing the following criteria, which will be applied to the assignment as a whole. Please refer to the course rubric for the definition of each marking catergory. Communication and writing ability: Ability to write in a clear and persuasive manner (10 marks). Ability to present a complex material in a structured and cohesive way (10 marks). Ability to work independently: Ability to organise the research and work towards the project with minimal supervision and assistance (10 marks)