Qn1a. See the excel sheet for the companies. The companies were selected in accordance with the need for discounted, premium rated and those priced at the Face Value. Essay Example

Lecturer:

Qn1a. See the excel sheet for the companies. The companies were selected in accordance with the need for discounted, premium rated and those priced at the Face Value.

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

c. As can be seen from the table in Qn 1b above, as long as the coupon rate >YTM, the bonds are valued at a premium (Ii.e prices are higher than the face value). This can be seen throughout the first 5 companies. From the table, it can also be seen that as long as the coupon rate is <YTM, the bonds are sold at a discount (i.e prices/bond value is less than the face value). This can be seen for the last 4 companies. Looking at the table, it can be concluded that as the difference between the coupon rate and the YTM becomes infinitesimally small, the difference between the face value and the bond price gets infinitesimally small too. On a mathematical basis, as long as the coupon rate=YTM, the face value= present value. This therefore confirms the statements as asked in this question.

Qn1d. Calculated duration

Qn1 d. In order to achieve the results for the results sought in this section, the constant factors were held so and the test factor altered in a manner that could give out a more vivid impression.

The table below can be used to verify that other things being equal, bonds with a higher coupon rate have a shorter duration.

From the table below, other things being equal, bonds with a higher YTM have a shorter duration.

Below is a table that can be used to verify that other things being equal, bonds with a longer time to maturity have a longer duration

QN2. Mortgages

1. Taking a £500000 payable 5 years.

He should take a mortgage plan that covers most of the project and with a reduced overall cost. In the case of Barclays, a mortgage plan of 3.9% total cost that covers 85% of his project and with a smaller initial interest rate of 3.49 is more convenient.

Taking the overall cost rate and without amortization, the monthly payment is £9,185.71 achieved using excel as shown in the excel sheet.

2. Taking £500000 payable 25 years.

It is a wise decision to take a mortgage that will cover the highest percentage of the job even if the costs are a bit higher. 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. In this assignment, without any procedure in selecting the bank, the bank chosen is the Bank of Scotland. It is then subject to the selection criterion for a 5 year and 25 year mortgages similar to those of Barclays. It includes the deposit (Opposite of loan to value for Barclays), and the total cost for the loan. The selected conditions are then computed for the monthly payments just like for Barclays as seen in the excel sheet.

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

In both the cases, the Barclays Mortgage is cheaper. However, the difference between the 5 year plan is bigger compared to the difference between 25 year plan. On a general assessment, the difference may not be significantly big.

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 :

Google=-0.38%

Microsoft= -0.33%

3b. See the excel sheet

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

3d. Covariance between Microsoft and Google is 0.00016509 as can be seen from the excel sheet results.

3.e Correlation coefficient between the two returns is 54.46% and is a positive correlation

3.f The following is the constructed portfolio and the efficient frontier curve

Table a: Constructed portfolio

Figure: The efficient Frontier plot

3.g The minimum variance portfolio

The minimum variance portfolio occurs at the most efficient point as located on the graph. This is at the point where the mean return is -0.353%. At this point he variance is 0.00023

3.h There are two points when there is minimum variance of 0.00023. At risk is 1.53% for both the returns of -0.353% and -0.348%. Based on the efficiency theory, the point that is taken as the minimum point is when portfolio returns are highest. i.e -0.348%