Acting as a portfolio manager, you will analyse and evaluate data sets to construct, manage and evaluate a debt portfolio. You will perform your calculations and analysis in Excel (20 marks) and produce a written report for senior treasury management in Word (10 marks).
View on Interest rates: Read up on the outlook for Australian Interest Rates 1-2 years ahead. Useful sources are the RBA, Treasury and the big retail banks. Your view on future interest rate movements will inform the decision you make in parts of the project. At the start of your project, write a small paragraph outlining the outlook for interest rates and the factors influencing the outlook.
Bond Portfolio Management Problem:
You are working for a small bond portfolio manager. Your portfolio consists of the following Australian CGS:
10yr semi-annual coupon paying bond with a coupon rate of 3%p.a and a YTM of 1.5%. (Hold 3 of these bonds)
5yr semi-annual coupon paying bond with a coupon rate of 2.5% p.a and a YTM of 1.25%. (Hold 5 of these bonds)
3yr semi-annual coupon paying bond with a coupon rate of 2.0% p.a and a YTM of 1%. (Hold 3 of these bonds)
With all three bonds having a face value of $100000
You have limits of the duration of your portfolio. The duration of you bond portfolio must be between 4 and 6 years.
Given your view on interest rates how would you want to change the duration of your portfolio? Provide an explanation to support your decision on how to change your portfolio.
3-, 5- and 10-year CGS Bond futures are available to trade via the ASX (https://www2.asx.com.au/markets/trade-our-derivatives-market/overview/interest-rate-derivatives/bond-derivatives)
Features of these contracts are as follows:
10 year contract: $100000 Face Value, 6%p.a. semi-annual coupon and current YTM of 1.72%p.a.
5 year contract: $100000 Face Value, 2%p.a. semi-annual coupon and current YTM of 1.35%p.a.
3 year contract: $100000 Face Value, 6%p.a. semi-annual coupon and current YTM of 1.15%p.a.
Outline a strategy using one or more of these contracts to achieve the desired duration position for your portfolio. You will need to find an approximate dollar value of exposure you need to buy or sell in the futures to achieve your desired duration.
Describe what risks you face from your strategy.
Structure of report:
- Discuss your view on Interest rates – include references to any websites, articles etc. that you read.
- Discuss the current portfolio, including an explanation of required calculations.
- How do you want to change the current portfolio (link to your view on rates)
- Describe how you will use futures to change duration, including an explanation of required calculations.
- Describe what risks you face from your strategy.
- Note: When writing your report, refer back to where in the spreadsheet, each calculation
- You will need to upload your excel spreadsheet containing all of your calculations
- No specific format required. Just make is clear what each little section is doing, e.g. Duration for Bond XYZ.
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