• March 2nd, 2016

Finance

Paper, Order, or Assignment Requirements

Financial modelling

Q1.  Bond price, yield and duration exercises

Go to the London Stock Exchange’s bonds’ website

http://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/retail-bonds-search.html

Select Corporates then click Search

Choose 2-3 bonds. Fixed coupon rate bonds only.

 

Required:

 

  • Record the key parameters of the bond needed for solving (b) – (e)

e.g., for bond code AE57, click its name, you’ll see

 

  • Work out their yields with the given coupons and listed prices.

 

  • Using your cases to support the statements that:

Bonds with the coupon rate < YTM will be priced at a discount;

Bonds with the coupon rate > YTM will be priced at a premium;

Bonds with the coupon rate = YTM will be priced at the face value.

 

  • Calculate their durations.

 

  • Verify that:

Other things being equal, bonds with a higher coupon rate have a shorter duration;

Other things being equal, bonds with a higher YTM have a shorter duration;

Other things being equal, bonds with a longer time to maturity have a longer duration.

25 marks

Note:   if you have difficulties in finding a pair of two bonds that are equal in maturity and YTM or coupon rate, it is acceptable that one of the bonds is real while the other is hypothetical.

 

 

Q2.  Mortgages

Go to Barclay’s mortgage pages

http://www.barclays.co.uk/mortgages

Click First-time buyer centre or New customers, then click Our mortgages, Fixed-rate mortgage. Look at 5 Year Fixed only. Ignore loan to value figures.

 

Required:

 

  • Suppose you are going to borrow £500,000 for five years, which is the best deal for you, taking account any fees adjustments if applicable? Work out your monthly repayment amount.

 

  • Suppose you are going to borrow £500,000 for 25 years, which is the best deal for you, taking account any fees adjustments if applicable? Work out your monthly repayment amount.

 

  • Find a bank of your choice, repeat the above processes for comparable mortgages.

 

  • Compare and contrast your results for Barclay’s and the bank of your choice.

 

  • Which product would you choose if you borrow the mortgage loan for five years? Which product would you choose if you opt for 25 years?

30 marks

 

 

Q3.  You are required to construct stock portfolios with returns on two stocks or two stock market indices. You can download stock return data from yahoo finance or other sources. The data can be of any frequencies and from any markets. Additionally, you need to find out a risk-free interest rate appropriate for the market you have chosen.

 

Required:

 

  • Estimate the expected returns on the two stocks or stock indices.

 

  • Estimate the variances and standard deviations of the two returns.

 

  • What is the covariance between the two returns?

 

  • What is the correlation coefficient between the two returns?

 

  • Plot the efficient frontier of the portfolios constructed with these two stocks or stock indices.

 

  • Find out the minimum variance portfolio constructed with these two stocks or stock indices, solving for the weights of the two stocks or stock indices in the portfolio.

 

  • What are the expected return and risk of this minimum variance portfolio?

 

  • Construct an optimal portfolio with these two stocks or stock indices and solve for the weights of the two stocks in the portfolio.

 

  • What are the expected return and risk of the optimal portfolio?

30 marks

 

Q4.  VaR exercises

Download returns on two or more stocks from yahoo finance or other sources. The data can be from any markets.

 

Required:

 

  • Estimate their VaR with different criteria and different investment horizons.

 

  • Using your cases to verify that:

Higher VaR losses with higher volatilities, other things being equal;

Higher VaR losses with tighter criteria, other things being equal.

 

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