Extra pages for order 482955 Essay Example

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Q1. (a) Record of key parameters of the bonds.

Examples of bonds

Coupon rate

Par value

Selling price

Maturity period

i.Brunt wood investments plc

ii. AVIVA plc

iii. B.A.T International finance plc.

iv. Safeway plc.

v. Burford Capital plc

vi. Beazley plc.

vii. Barclays

Viii. Ashford plc (hypothetical)

(b) Calculating yields:

Current yields = annual interest payment / current market price of the bond

  1. Brunt wood Investments plc

= 6%*100/104.75 = 5.73%

  1. AVIVA plc. = 6.125%*100/99.28 = 6.17%

  2. B.A.T international finance plc. =6.375%100*116.15 = 5.49%

  3. Safeway plc, = 6.125%*100/108.15 = 5.66%

  4. Burford Capital plc = 6.5%100/103 = 6.32%

  5. Beazley plc. = 5.375%100/103.62 = 5.19%

  6. Barclays = 5.75%100/106.5 = 5.4%

  7. The hypothetical case, Ashford plc. = 6%100/100 = 6%

(c) Supportive statements:

(i) Bonds with the coupon rate less than YTM will be priced at a discount

This is evidenced by AVIVA plc, which has a lesser coupon rate than the yield. The bond is said to be priced at a discount since the market selling price is less than the bond’s par value.

(ii) Bonds with the coupon rate greater than the yield will be priced at a premium

Apart from AVIVA plc, the rest bonds have a coupon rate greater than the yield to maturity. Their market price is greater than their par value hence priced at the premium.

(iii) Bonds with the coupon rate equal to the yield to maturity will be priced at the face value

Using a hypothetical bond (Ashford plc) with coupon rate equal to yield to maturity, the par value is equal to the market selling price and, therefore, will be priced at the face value.

Q2. Mortgages

  1. A loan of £500,000 for five years will be preferred for an interest rate of 2.25%. (see the workings on Excel)

  2. A loan of £500,000 for twenty-five years will be preferred for an interest rate of 2.25%

  3. See workings in Excel

  4. Barclays Bank has cheaper mortgages compared to HSBC Holdings Plc.

  5. For a loan repayment of 5 years, Barclays Bank is preferable with an initial interest rate of 2.25%, and also preferable for 25 years loan repayment with an initial interest rate of 2.25%.

Q3. Stock portfolios

  1. Estimating expected returns of the portfolio

Security Amount invested (£) Expected return (%)

Part oil 15,000 15

Kit chemical 10,000 16

The portfolio has an expected return of 15.4% as seen in the workings.

  1. Variances and standard deviations of the two returns

The portfolio has a variance of 0.24 and a standard deviation of 0.49.

  1. Covariance of the two stocks

Covariance = sum of (return on part oil – average part oil)*(return on kit chemical – average kit


(Sample size-1)

(i) Correlation coefficient = Cov (rx, ry)/ standard deviation of x & y

= 0.24/ 0.49

Q4. (a) Value at Risk (VaR) calculations;

This is a measure of risk on a portfolio. It involves the following steps;

    • Setting VaR parameters

    • Establishing market value of the different positions

    • Calculation of VaR of each position with the market volatilities

    • Calculation of portfolio VaR with correlations of the variables

VaR = Market value * price volatility

(See calculations in the Excel)