You have to do question 8 using EIKON software
AFIN8099: Current Issues in Banking and Finance – Major Assignment • Weighting: 50% • Total marks: 20 Instructions • Attempt all the questions and read each carefully. • Be creative with your presentation – Charts, graphs, and interesting content is favoured. • Make sure you search thoroughly on Eikon – Use the toolbar and go through all the available options. • This will be one of the harder assignments you will have done at university – It is okay to take time to think and work through each question. • Save your work as a PDF with the following document title: Group_X • Only one member of the group has to submit the assignment. The COVID-19 outbreak and its subsequent economic impacts have driven authorities around the world to propose a series of stimulatory policies. On the 21st of July 2020, the European Commission approved a €750 billion economic recovery package aimed specifically to counteract the effects of the pandemic. As part of this package, a proportion of the €750 billion is allocated for strategic investments in global financial markets. To facilitate the investment of these funds, the European Commission has allocated capital to a handful of fund managers. As part of this package, the European Commission has allocated your team AU$500,000,000 to invest in Australian corporate bonds. It is your job to build an investment portfolio while strictly adhering to the mandate proposed by the commission. You must: • Invest only in corporate bonds denominated in Australian dollars. • Utilise the full $500,000,000 to build the portfolio. • Invest in 20 different Australian corporate bonds – Due to the smaller size of the market, you can have a maximum of 2 bonds issued by the same corporation in your portfolio. The rest must be from different issuers. • You are free to choose from fixed or floating rate securities – There is no limit for each. • The corporate bonds can be issued in any market around the world – as long as they are denominated in AUD. • Each security must be at least $100,000,000 in issuance size or larger to ensure appropriate liquidity. • This is a longer-term investment program. Each security must have a maturity date equal to or greater than 2023. • You can create a diversified or concentrated portfolio – Any portfolio composition is fine as long as it can be justified. • The corporate bonds must be issued by a corporation that is listed on a public exchange so that you may access financial reporting. • Consider the current economic climate when creating your portfolio. 1 Question 1 (2 marks): Before selecting securities, it is first important to discuss as a group what sort of portfolio you intend to create. Will you be creating a diversified or concentrated portfolio and why? Discuss with respect to the current economic climate. Ensure you all agree on your answer to this question before moving on as you will be coming back to this answer for guidance. Question 2 (3 marks): List the bonds you have chosen in a table. Include the name of the corporate issuer, the security name (Typically given on Eikon as: ABC 0.000 01/01/1900), the time to maturity, the yield to maturity, the coupon, the issuance size of the deal, whether the bond is fixed or floating, and the current spread. If it is a fixed rate bond, the required spread is the ’Swap Spread’. If the bond is floating, provide the ’Discount Margin’. You can begin by using the ’CBPX’ page to search for the bonds and imposing the mandate’s restrictions by using the filters on the left-hand side. All the information can be found by clicking on the ’ISIN’ for each security and looking at the description, valuation, and bond calculator (BNDC) pages. Question 3 (2 marks): Provide a breakdown of the geographic distribution of your portfolio and the allocated weightings in each bond. You may find it useful to use bar or pie charts. How have you allocated the weightings in your portfolio? What are your biggest and smallest holdings? Does this make sense given your answer in Question 1? (You are free to allocate the weightings in your portfolio in any manner you wish, as long as it makes sense). Question 4 (3 marks): For each of the issuers derive the following credit metrics and discuss which corporate ap- pears to be the safest and which is the riskiest in your portfolio. Use the most recent annual report available for each issuer (You can typically find annual reports on the investor relations page if they are a public company). Present all the findings in AUD – If the issuer reports in a foreign currency, adjust the results using the prevailing spot exchange rate. For instance, the AUD to USD rate on Eikon is simply AUD/USD. • Total Assets • Total Equity • Total Debt • Interest Expense • EBITDA (If you have chosen a bank use the Operating Income) • Total Debt / EBITDA • Interest Coverage Ratio • Gearing Ratio Question 5 (2 marks): Compute the yield to maturity, coupon, credit spread, and time to maturity of your portfolio. Compare these statistics to a hypothetical portfolio that is equally weighted. Which statistics change the most? Does this make you question your decision in Question 1? Question 6 (1 marks): Given all your securities are denominated in AUD, it is useful to determine what the spread of each security would be in a foreign currency. For each of the fixed rate bonds only, report the Swap Spread in USD, EUR, and JPY using the cross-currency tab in the bond calculator (BNDC). Question 7 (2 marks): Compute the duration and spread duration of the portfolio. For the fixed rate bonds use the modified duration and for the floating rate notes use the spread duration. These measures should be reported on the valu- ations page. Once this has been done, conduct a sensitivity analysis on the portfolio and show in a line chart what would happen on the value of the portfolio if the credit spread changed by 25bps, 35bps, 45bps, 50bps, & 55bps. Show the effect of the change both in terms of an increase and a decrease in the spread. Assume there is no convexity. Question 8 (2 marks): Report the credit rating of each security and the default probability as given on Eikon. If the security is not rated, use the credit rating of the issuer. If you still cannot find a credit rating, assume the security is rated ’BB’. You can find the credit ratings on the description page. To find the default probabilities you can search in the following manner: For instance, for a ’BBB’ rated security type: ’BBBAUDD5Y= Q’ (Leave a space between = and Q). Assume each security is a 5 year security for simplicity and that there is no differentiation between notching (BBB+ and BBB– are the same). For ’BB’ or non-rated securities use ’BBUSDD5Y= Q’. Finally, compute the credit rating and default probability of the overall portfolio. What sort of credit rating does the portfolio resemble the most? 2 Question 9 (3 marks): Assume now that you want to hedge against a default in your portfolio. Using the ITRAXX, which is a CDS contract that protects against defaults in the Australian credit market, calculate the total profit/loss on the portfolio if a default occurs in the fourth year. Assuming you are hedging against the total $500,000,000 value of the portfolio. To find the current CDS Spread type ’ITAAU5Y= Q’ (Leave a space between = and Q). Take the CDS Spread given in the left-hand hand corner of the screen under the ’Latest’ heading (If you hover over it, it should come up with a message that says PRIMACT_1). The recovery rate should be given on the same screen. Assume the CDS Spread is paid quarterly and is quoted on Eikon as an annual rate in basis points. Draw a cashflow diagram to depict the transaction. /End of assignment 3 AFIN8099: Current Issues in Banking and Finance – Major Assignment AFIN8099: Current Issues in Banking and Finance – Major Assignment • Weighting: 50% • Total marks: 20 Instructions • Do not exceed the 1000 word limit. • This is an individual component – You must answer this question independently. • Save your work as a PDF with the following document title: Name_Surname_StudentID. Now that you have successfully created your investment portfolio, it is time to critically reflect on your work. Criti- cal reflection refers to a manner of thinking whereby the participant carefully questions and critiques their work. In a maximum of 1,000 words, discuss the following points. Please note that you can write in the possessive sense (e.g. I think or I believe) and that no academic references are needed. • Briefly discuss the portfolio you have created and why you believe it is appropriate for the current economic climate. • What did you find as the most difficult aspect of this assignment and why? • If you could start again, what would you do differently? • What are your thoughts on the current economic climate? You may find it useful to browse through the Reserve Bank of Australia Statement on Monetary Policy. (Please note – Do not plagiarise this document. Use it to help you think about your arguments). • What do you think you learned as part of this lecture series and assignment? How can you leverage your new skills for the future? /End of assignment 1 https://www.rba.gov.au/publications/smp/2020/aug/#:~:text=The%20Statement%20on%20Monetary%20Policy,issued%20four%20times%20a%20year.