Australian Commonwealth Government Securities

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Assessment 2 Specification BAFI1065 – Semester 1, 2021 (35%)
(Maximum of 12 pages submitted, not including appendices)
Due: Friday 14thMay, 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 (not the indexed bond). Collect the key characteristics of each of the bonds (coupon rate, maturity date) and bond yield data as at the end of June 2020 (last working day of the month) and the end of December 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: (17 Marks)
A. Calculate the dirty price, clean price, modified duration and modified convexity of the Government bonds at the end of June 2020 and the end of December 2020. Discuss your results. (6 marks)
B. Calculate the holding period return over the period from the end of June 2020 to the end of December 2020 in each bond. Discuss your results. (4 marks)
C. Calculate the modified duration and modified convexity for an equally-weighted portfolio of the four bonds at both dates. 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. (7 marks)
Part 2: (18 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 2020 and the end of December 2020 (i.e. not just the four bonds in your portfolio, all bonds from table f16 except the indexed bonds). Estimate the spot curve and forward curve for 5 years. Present and discuss your findings. (7 marks)
B. Review the yield, spot, and forward curves’ predictive ability with a 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 June 2020 forward curve appear to predict the six-month spot rates in December 2020? Comment. (11 marks)

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