BAFI 1065- PROJECT SPECIFICATION

PROJECT SPECIFICATIONdue date:Wednesday 18th May 2016 11p.m(Maximum of 10 pages submitted, not including appendices)The major project is to be done in groups of THREE. Each group will 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 June 2015 (last working day) and the end of December 2015 (last working day). The bond data can be found on the RBA website (http://www.rba.gov.au) (you will have to do some exploration of the site to find and understand what you are looking for).Required:Part 1: (12 Marks)A. Calculate the dirty price, clean price, modified duration and modified convexity of the Government bonds as at the end of July 2015 and the end ofDecember 2015. (4 marks)B. Calculate the holding period return for each of the bonds over the period from July 2014 and the end of December 2015. (4 marks)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 and the separate bonds at both dates. (4 marks)(hint – the dirty prices you need for part A are found in an interim step in the duration calculation, no need to calculate them separately).Part 2: (12 Marks)A. Use all available Government bond data (i.e. not just the bonds in your portfolio) to construct and present a yield curve, spot curve and forward curveas at the end of July 2015 and the end of December 2015. Your spot curve and forward curve estimation should go out no more than 5 years. Present anddiscuss your findings. (4 marks)B. Review the predictive ability of the yield, spot and forward curves with comprehensive reference to the relevant academic literature. Discuss thecurves that you have estimated in Part 2A with reference to this literature. Does the July 2015 forward curve predict the 6 month spot rates at December2015? Comment. (8 marks)Further Requirements:In order to achieve a passing grade your submission should at least be technically accurate throughout. Your submission should be in report format with results of Part A summarised and discussed in an appropriate manner and all workings shown in technical appendices. Part B is a research and analysis task and appropriate referencing and presentation must be used in accordance with RMIT’s guidelines for the presentation and submission of written work, as indicated on page 4 of this guide(shown as blow). These are minimum requirements and failure to comply may mean that your submission does not meet the basic requirements for a passing grade.page 4 of this guide:Report Writing- Reports are to be well written and students are expected to follow the guidelines set out in the document entitled “Written Reports and Essays: Guidelines for Referencing and Presentation in RMIT Business”. This can be found at the website: http://mams.rmit.edu.au/s9sx559hurvc.rtf. There is considerable information in this document and it is well worth reading.An Email from tutor about this assignment:Part oneJust to clarify, for part one you may use any bonds you like.Part twoFor part two of the assignments you should use all available bond data to construct the yield curve. However for the purposes of the spot curve and the forward curve you should select 3-4 “on the run” securities of maturities up to 2020 (or a little later).