Qn1a. See the table below for the selected companies Essay Example

Lecturer:

Qn1a. See the table below for the selected companies

Qn1. b. See the excel sheet for the results of the yields. They are as shown below

Table: An illustration how prices vary with YTM. The Face value is 100 for both the companies

Name of company

Annual Coupon Rate

Bond Value

Bruntwood

CLS Holding

Ladbrokes Group

Coventry

Intl Personal Finance

Eros Intl

c. From the table in Qn 1b above, the bonds are valued at a premium (i prices are higher than the Par value of the bond) when the coupon rate >YTM .This can be seen throughout the first companies up to where the Coupon rate is not less than. The bonds are sold at a discount (bond value is less than the face value) When the coupon rate <YTM. From the given data, there are no companies trading and the face value. However, as the results show, when the coupon rate tends to be equal to YTM, the difference between the face value and the bond price gets smaller Since the observation is made from both the directions of discounted and premium bonds, it therefore means that when, the coupon rate=YTM, the bond will trade at the face value.

Qn1d. Calculated duration

Annual Coupon Rate

time to maturity

Duration t

Bruntwood

3.5312596

4.8637996

CLS Holding

3.1509265

Ladbrokes Group

5.4703664

Coventry

15.6843605

Intl Personal Finance

3.4601513

Eros Intl

4.0992259

Qn1 d. The table below can be used to verify that higher coupon rates lead to a shorter duration.

Annual Coupon Rate

Duration time

Ladbrokes Group

3.4963153

CLS Holding

3.4777118

Bruntwood

3.4636376

Coventry

3.4602428

Intl Personal Finance

3.4477450

3.4303600

Eros Intl

3.4303600

When everything else is equal, Bonds with a higher YTM have a shorter duration as the table below illustrates

Duration time

Ladbrokes Group

3.5204016

CLS Holding

3.4963153

Bruntwood

3.4723504

Coventry

3.4593444

Intl Personal Finance

3.4247745

3.4011584

Eros Intl

3.3776539

The table below can also be used to observe(verify) that bonds with a longer time to maturity have a longer duration

maturity date

Duration time

Bruntwood

03/04/2020

3.5264248

03/04/2030

9.9820981

CLS Holding

03/04/2040

14.6213758

Ladbrokes Group

03/04/2050

18.1996212

Coventry

03/04/2060

21.0486461

Intl Personal Finance

03/04/2070

23.3495526

Eros Intl

03/04/2080

25.2181111

QN2. Mortgages

  1. Taking a £500000 payable 5 years.

The most suitable mortgage is the one that covers the largest percentage of the project a convenient rate. The mortgage at 3.9% total cost that covers 85% is the best there is.

From the excel computation, the result is £9,185.71 monthly payment.

  1. Taking £500000 payable 25 years.

A 25 year mortgage covers the largest portion of the project (90) is the best . This is because the costs will be spread over very longer period of time such that they may be easily manageable. In this case, a loan which covers 90% of the project is available at 4.1% overall cost and it is the best. Although it’s initial interest rate is higher by percentage, it is lower by actual value. The monthly payment for the said mortgage is £2,666.87 as computed from excel.

C. The Bank of Scotland is the bank of choice due to the available data for the rates. For comparison purposes, the bank was subject to the same condition as Barclays. It includes the deposit and the total cost for the loan.

D. Below is the comparison of the Bank of Scotland and Barclays.

Annual rate

Monthly payments

Barclays

£500,000.00

-£9,185.71

£500,000.00

-£2,666.87

Bank of Scotland

£500,000.00

-£9,253.46

£500,000.00

-£2,694.71

Barclays is seen as to be better than the Bank of Scotland. The difference between the 5 year plan is bigger compared to the difference between 25 year plan.

E. For both cases, based on the monthly payments, I would choose Barclays.

Qn.3. Stock Portfolios

The stocks selected are for Google and Microsoft. The workout is as shown in excel sheet

3a. Expected returns.

The average daily expected returns for the month of February is as follows : The daily expected returns can be seen on the excel sheet

Yahoo=-0.30%

Google= 0.33%

3c. Variances and std deviations of Microsoft and google for the Feb

Variance

0.000240

0.000084

Standard deviation

3d. Covariance between Yahoo and Google is 0.00002859 (See the excel sheet for the formula).

3.e The returns for the two stocks have a positive correlation of 20.16%.

3.f The constructed Portfolio and the efficient frontier are as shown below

Table: Portfolio

mean return

Variance

Financial modelling

Figure: The efficient Frontier plot

3.g From the portfolio table, the minimum portfolio variance is 0.00007. However, there are two points of minimum portfolio variance as seen from the table

3.h Taking into account the efficiency issues (higher returns, minimum risk), the minimum variance is at the point where risk is 0.85% and portfolio return is 0.207%. The other point is at risk=0.86% and portfolio return=0.144%