# 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%

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

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%