Assignment, Finance and Accounting

Assignment, Finance and Accounting
Fixed income

Project description
All calculations for all questions must be presented in one Excel spreadsheet. In order to be awarded with the full mark for each question the spreadsheet must include

all information and all correct calculations; it must also be well-presented, clear and user-friendly. The (brief) explanation and discussion requested for part (c)

must be presented in the Word file of the group assignment. Marking criteria will take into account clarity, correctness, rigor, efficiency, and parsimony. Overall

word limit for Question 1on the Word file must be 500 words maximum.

QUESTION 1
Select two companies listed on the FTSE 100 Index (different from the ones that have been used in the lecture/seminar material of this module or as part of your

assignments in any other modules. This will be checked.) For each company, select a coupon bond. The two bonds must have respectively 3 and 5 years remaining time to

maturity.  You can use for this purpose main financial newspapers (Financial Times, Wall Street Journal) or databases (Datastream, Bloomberg).
Assume that the term structure of interest rates can only shift upwards or downwards (i.e. at any point of time all interest rates at all maturities can only change by

equal margins). Additionally, ignore any issue related to default risk.
(a) Report clearly all bonds’ specifics and the source of your data. Then, calculate the Macaulay durations of the two bonds showing the full cash-flows working (Do

not use the “duration” function on Excel; even if the quoted bond prices are given by your data-source, re-calculate them using the full cash-flow workings.)      (15%

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mark)
(b) Suppose that you have £1 million to invest and you wish to construct a bond portfolio which is immunized with respect to a 4-year horizon. You opt for a duration-

immunization. How much par of each of the two bonds do you buy?      (10% mark)
(c) Suppose that during the first year of holding this portfolio, interest rates move: (i) up by 10 basis points; and (ii) up by 100 basis points. Show that your

position is immunized by computing the change in value of your position at the 4-year horizon in each case (i) and (ii). How well is your portfolio protected against

interest rate risk? Discuss and explain briefly your findings.         (25% mark)
Your answer to Question 1 should be structured as follows:
• All calculations for all questions must be presented in one Excel spreadsheet. In order to be awarded with the full mark for each question the spreadsheet must

include all information and all correct calculations; it must also be well-presented, clear and user-friendly. • The (brief) explanation and discussion requested for

part (c) must be presented in the Word file of the group assignment. Marking criteria will take into account clarity, correctness, rigor, efficiency, and parsimony.

Overall word limit for Question 1on the Word file must be 500 words maximum.

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