ECON1239 Principles of Finance: Assessment Task 2 Complete
ECON1239 Principles of Finance: Assessment Task 2 Complete
- General Information
This assessment comprises a paper of about 2,000 (i.e., 7 s double-spaced, 12 pts Time New Roman font type). Students are asked to prepare a report setting out a basic analysis of the bond market in two selected countries. The focus of this assessment task is to test the students’ understanding of CLOs 1, 2, 3, and 4. The due date for this assessment task is specified on the Canvas course site.
Task in Brief: ECON1239 Principles of Finance: Assessment Task 2 Complete
“You are a bond analyst working for a securities firm. Prepare a report which sets out an analysis of the bond market in two selected countries using the real-world, recent bond data you have collected from reliable sources and the forecasting techniques and concepts covered in the course to replicate realistic predictions for future inflation and interest rates. It is not sufficient to simply present typed or spreadsheet solutions. You are required to demonstrate and explain your assumptions and detailed workings to obtain your solutions, conclusions, arguments, and statements.”
You are reminded that it is an individual assignment and the analysis for the assignment should be done separately.
ECON1239 Principles of Finance: Assessment Task 2 Complete Materials:
Bond market data and other relevant data from reliable sources, e.g., central banks, Bloomberg, Thomson-Reuter, IMF website, subscribed databases, etc.
The second assignment for the course requires that for any TWO countries of your choice, you make a prediction for interest rates and inflation over the short, intermediate, and long terms (it is up to you how you choose to define these terms).
The basis of your predictions must be your examination of bond prices in that country for various durations.
One recommendation for finding such prices is: http://www.bloomberg.com/markets/rates-bonds/government-bonds/** in the above address, insert ** = us, uk, germany, australia, or japan
Allowing for a general Introduction and the statement of your methodology, the presentation of your data, your analysis (the heart of your assignment), as well as your views on the robustness of your analysis, and a Conclusion.
Marks:
The allocation of marks will be divided among the following areas: (1) General and Presentation, (3) Range and accuracy of calculations and collected data, (4) Economic analysis and interpretation of results and findings, including original contribution.
A rubric marking guide listing specific points under each of these three categories will be provided for the assessment of your assignment. This should be used as guidance in the preparation of your assignment.
ECON1239 Principles of Finance: Assessment Task 2 Complete Submission:
The assignment must be submitted in class in stapled hard copy format. A coversheet must be completed and stapled to the front of the assignment. Further instructions and tips for completing this assignment will be provided on the Canvas course website.
World Limit:
2,000 words, typed 12 pts, Times New Roman font type, A4-sized pages, stapled top-left corner.
Due date:
Submit a hard copy of your Assessment Task 2 at the lecture in teaching week 9.
- Assignment Requirements
Please consult the appendix to this document for an example of how to analyse the bond data within the context of your course. The core elements of this assignment contain eight (8) parts, each carrying an equal weight. A discussion of the assignment will be held at the lecture in teaching week 5. Please read carefully the following.
Part 1:
You are required to collect the most recent bond market data, namely, yields to maturity, over the periods for which you have the data. Your data must be from reliable sources, e.g., you should not collect the data from personal blogs. Also, it should not be from too generic sources, i.e., you should not collect data from Wikipedia.
You are required to choose the US and one other country of your own choosing.
Part 1A:
Collect the yields to maturity and other relevant data, if any, for the maturities of 1, 2, 5, 10, 20, and 30 years. Present your data clearly and neatly in a properly formatted table.
Part 1B:
Consult the appendix to this assignment to gain a basic understanding of the approximate method for predicting future interest rates. Use the approximate method to calculate the discount rate (“DR”) that the bond market appears to consider appropriate over the following periods:
- For 1-year
- Averaged over 1 – 2 years
- Averaged over 3 – 5 years
- Averaged over 6 – 10 years
- Averaged over 11 – 20 years
- Averaged over 21 – 30 years
Show all of your detailed workings for at least one country, i.e., either for the USA or for the country of your own choosing, or both. Present your calculations clearly and neatly.
Part 2:
Use the reliable internet sources to collect the predicted rates of inflation for all the periods for which you have forecasted the discount rates. Use your calculated discount rates and these inflation rates to predict the real rates of interests for those periods based on the following formula:
For future periods in which there are no predicted inflation rates, you can assume either that the last predicted inflation rate will stay constant for such periods or that the last real rate of interest as calculated will stay constant.
Show all your detailed workings, for at least one country, in this part of your assignment. You can present these workings in an appendix if necessary
Part 3:
Use your results to compare the predicted rates between the USA and your selected country. Make sure that you use your own economic analysis of your results or findings. For example, stating that one rate is higher than the other without any further comment on the reasons for it does not constitute economic analysis. In addition, if you use any other expert opinions from such sources as financial newspapers or statements by some central bank, make sure to quote the source properly.
Part 4:
Use your forecasting results in previous parts to make comments on the USA and the rates on TIPS (Treasury Inflation-Protected Securities).
Part 5:
Comment on how the YTMs of Treasury bonds have changed since November 1st, 2018 as below. How does the market appear to have changed its predictions?
| Year-bond | US | US TIPS | Australia | Japan | Germany | UK |
| Cash | 2.25% | 1.50% | -0.10% | 2.05% | 0.75% | |
| 3-month | 2.32% | – | – | – | – | |
| 6-month | 2.48% | – | – | – | – | |
| 12-month | 2.65% | – | – | – | – | |
| 2-year | 2.87% | 2.00% | -0.12% | -0.63% | 0.74% | |
| 5-year | 2.99% | 1.06% | 2.19% | -0.08% | -0.20% | 1.02% |
| 10-year | 3.16% | 1.09% | 2.65% | 0.12% | 0.38% | 1.43% |
| 15-year | – | 2.81% | – | – | – | |
| 20-year | 3.41% | 1.18% | – | 0.65% | – | – |
| 30-year | 1.31% | – | 0.88% | 1.01% | 1.86% |
Part 6:
Use the relevant theories of the term structure of interest rates to discuss how they affect your interpretation/results/findings.
Part 7:
In the light of your findings, comment on the excerpt below from The Economist:
Buttonwood 4-10 March 2017.
“If there is one aspect of the current era sure to obsess the financial historians of tomorrow, it is the unprecedented low level of interest rates. Never before have deposit rates or bond yields been so depressed in nominal terms, with some governments even able to borrow at negative rates. It is taking a long time for investors to adjust their assumptions accordingly. Real interest rates (i.e., allowing for inflation) are also low. As measured by inflation-linked bonds, they are around minus 1 % in big rich economies.”
Part 8:
Discuss how you see the implications of your findings for the stock market.
Appendix
Example 1: The Expectations Hypothesis
According to the expectations hypothesis, a bond’s yield to maturity (YTM), which represents investors’ required rate of return on the bond, is directly related to expectations of inflation and prevailing interest rates. Thus, consider the following:
- A Treasury bond with a face value of $100 and a coupon payment of 7.1% has one year to maturity. Thus, 1 year from now, the bond is scheduled to make a payment of $100 together with a final coupon payment of $100 * 0.071 = $7.1. If the bond is currently priced at $102.00, the YTM for the bond is
So, YTM = 0.05, or 5.0%. Therefore, we determine 5.0% as the prevailing 1-year interest rate on Treasury bonds. Since Treasury bonds can be considered effectively free from default risk, they provide a useful benchmark for interest rates. For instance, if inflation is running at, say, 2.4% per annum, we might deduce that bondholders require a risk-free real rate of interest per annum of approximately 2.6% per annum (≈ 0.05 – 0.024), or more precisely,
=
- Now suppose that at the same time, a 2-year Treasury bond with a face value of $100 is scheduled to make a coupon payment of 7.1% both 1 year and 2 years from now, and that it is currently priced at $102.99. To determine bond investors’ required rate of return on this bond in Year 2, that is, YTM2, we solve the following equation:
where YTM1 is the YTM in Year 1 (determined for one-year Treasury bonds as above = 5.0%) and YTM2 is the YTM in Year 2. Hence,
which yields YTM2 (in Year 2) = 0.06 (6.0%).
Therefore, it appears that the market anticipates an annual interest rate of 6.0% for Treasury bonds in Year 2, and accordingly, if we believe that bond investors will continue to require a real rate of interest on Treasury bonds of 2.54% over 2 years, the bond allows us to predict the investors’ anticipated inflation rate, denoted as inflation rate2, for Year 2, as follows:
So, inflation rate2 (the anticipated inflation rate in Year 2) is
Example 2: Forecasting Future Rates
Suppose that a Treasury bond with a face value of $100 and a coupon rate of 5.2% has 1 year to maturity (i.e., a “1-year bond”). Thus, one year from now, the bond is scheduled to make a payment of $100 together with a final coupon payment of $100 * 0.052 = $5.2. If the bond is currently priced at $100.19, the yield to maturity for the bond over the coming 1-year period (YTM1) is
which yields YTM1 = = 0.050, or 5.0%. This is the discount rate, DR1, that the market considers appropriate over the coming 1-year period.
Now suppose that a Treasury bond with a face value of $100 and a coupon rate of 7.1% has 2 years to maturity (i.e., a “2-year bond”). Thus, one year from now, the bond is scheduled to make a payment of $100 * 0.071 = $7.1, and 2 years from now, it will make a payment of $100 together with a final coupon payment of $7.1. If the bond is currently priced at $102.99, we can find the yield to maturity for the 2-year bond (YTM2) by solving the following equation:
Therefore, YTM2 = 5.48%.
Note: You can solve for YTMs using the IRR function in Excel. Alternatively, you can set up your Excel spreadsheet for the valuation of the bond as the fundamental equation above and gradually adjust the input YTM2 until you get the valuation to equal $102.99; this can be done easily using the Excel “Goal Seek” or “Excel Solver”.
The question we now ask is: What is the discount rate, DR2, that the market appears to consider appropriate for the 2nd year? Note that it is not 5.48%, because this is the discount rate averaged over the 2 years (and recall that the appropriate discount rate is 5.0% for the 1st year). In fact, to solve for the discount rate that the market is imposing in the 2nd year, DR2, we need to solve:
where YTM1 is the YTM in Year 1 (determined for 1-year Treasury bonds as above = 5.0%) and DR2 is the appropriate discount rate for Year 2. Therefore,
which yields DR2 (in Year 2) = 0.060 (6.0%).
Approximate approach
Instead of using the above equation to determine the DR2 value in Year 2, we can approximate DR2 by applying the following simple relation:
(1+ DR1)(1+ DR2) = (1+YTM2)2
(YTM2 is the YTM for a 2-year bond), for which we have DR1= 0.05 and YTM2 = 0.0548, so that:
(1.05)(1+ DR2) = (1.0548)2
which yields the approximate value of DR2 = (1.0548)2/(1.05) – 1 = 0.0596 (5.96%), as compared with DR2 = 0.060 (6.0%) as computed previously. Thus, the approximation appears sufficient.
Suppose now that a Treasury bond with a face value of $100 and a coupon rate of 5.0% has 5 years to maturity. Thus, one year from now, the bond is scheduled to make a payment of $100 * 0.05 = $5.0, and thereafter, until 5 years from now, make a payment of $100 together with a final coupon payment of $5.0. If the bond is currently priced at $91.80, we can solve for the yield to maturity for a 5-year bond (YTM5) using the following equation:
which yields YTM5 = 7.0%.
We now ask: What is the discount rate, DR3/5, that the market appears to consider appropriate for years 3 to 5? To answer this question, we solve the following equation:
where DR1 = 5.0% and DR2 = 6.0%, so that:
which yields DR3/5 = 8.16% .
Approximate approach
Note that rather than use the above method to determine the DR3/5 value for Year 3 through Year 5, we can approximate it by using the following relation:
(1+ DR1) (1+ DR2) (1+ DR3/5)3 = (1+YTM5)5
for which we have DR1= 0.05, DR2 = 0.06 and YTM5 = 0.07, so that:
(1.05) (1.06) (1+ DR3/5)3 = (1.07)5
yielding DR3/5 = [(1.07)5/[(1.05)(1.06)]]1/3 – 1 = 0.080 (8.0%), which compares with DR3/5 = 0.0816 (8.16%) calculated earlier.
Nominal rates, inflation, and real rates
As Treasury bonds are regarded as effectively free from default risk, they provide a useful benchmark for interest rates. For example, if we predict that inflation will be running at, say, 6.0% per annum over the next 3, 4, and 5 years ahead, we can deduce that bondholders require a risk-free real rate of interest of approximately DR3/5 as calculated above minus the inflation rate = 8.16% – 6.0% = 2.16% per annum. More precisely, we would deduce that bond investors anticipate a risk-free real rate of interest per annum for 3, 4 and 5 years forward as
= = 1.02 – 1 = 0.020, or 2.0%.
Alternatively, if we considered that investors will have a required real rate of return on Treasury bonds equal to, say, 2.5%, we would deduce the market’s prediction for inflation in years 3 – 5 as – 1 = 5.5%.
Rubrics Assessment 2: ECON1239 Principles of Finance: Assessment Task 2 Complete
Rubrics Assessment 2
Criteria Ratings Pts
General & Presentation
Overall, the assignment shows evidence of a solid understanding of major analytical concepts in answering the question, more extensive reading, quality of argument, proper referencing, and professional writing style
20.0 to >15.0 pts
High Distinction
Shows a high-quality piece of written work expected of a working professional in terms of grammar, style, presentation, formatting, referencing, conducted research
15.0 to >10.0 pts
Distinction
Demonstrate a good piece of writing but with minor errors in some places (e.g., grammatical errors, sentence structure, use of punctuation, etc.)
10.0 to >5.0 pts
Credit
Written work showing a reasonable quality with a need for much further work to improve the basic techniques of writing
5.0 to >0.0 pts
Pass
Show much room for improvement in terms of style, grammar, sentence structure, use of punctuation, formatting, or referencing,
0.0 pts
Fail
Written work similar to another student’s work from this semester, spelling and grammar errors throughout, bad sentence structure and use of words, seriously incorrect referencing, ambiguous writing
20.0 pts
Part 1
Real-world bond data collection, collation, processing, preparation, and application of forecasting techniques to the data
10.0 to >7.5 pts
High Distinction
Full available data collected from reliable sources, properly acknowledged, clearly and neatly presented, properly reformatted and easily verifiable (source given, country of choice clearly stated, etc.), accurate calculations made and clearly presented with full workings shown for all periods for both countries and clear assumptions or explanations where necessary. ECON1239 Principles of Finance: Assessment Task 2 Complete
7.5 to >5.0 pts
Distinction
Full available data collected from reliable sources, properly referenced, easily verifiable, but little evidence of properly presented data (e.g., just copy and paste as is, etc.), accurate calculations made and presented with full workings shown for all periods for at least one country but lacking in assumptions or explanations where necessary
5.0 to >2.5 pts
Credit
Data available collected, but not fully, from reliable sources, improperly acknowledged, little evidence of any effort in reorganising data for presentation purposes (e.g., data copied and pasted as is spanning over one page, etc.), correct calculations made and presented but not showing full workings for all periods for either country and no assumptions given where necessary
2.5 to >0.0 pts
Pass
Data available collected, but incompletely, from reliable sources but without acknowledgement, hard to verify the source, data poorly presented or summarised, poorly reformatted, correct calculations but not showing full workings for all periods, no evidence of making any assumption or explanation where necessary
0.0 pts
Fail
Data collected from unverifiable sources (e.g., without source), no referencing made, data impossible to verify, poorly reformatted or presented, incorrect
10.0 pts
Part 2
Real-world inflation data collection, collation, processing, preparation, and application of forecasting techniques to the data
10.0 to >7.5 pts
High Distinction
Full available data collected from reliable sources, properly acknowledged, clearly and neatly presented, properly reformatted and easily verifiable (source given, country of choice clearly stated, etc.), accurate calculations made based on the given formula in the question and clearly presented with full workings shown for all periods for both countries, clear assumptions or explanations where necessary (e.g., where data unavailable requiring own calculation or forecasting based on some assumption) ECON1239 Principles of Finance: Assessment Task 2 Complete
7.5 to >5.0 pts
Distinction
Full available data collected from reliable sources, properly referenced, easily verifiable, but little evidence of properly presented data (e.g., just copy and paste as is, etc.), accurate calculations made and presented with full workings shown for all periods for at least one country but lacking in or unclear assumptions or explanations where necessary
5.0 to >2.5 pts
Credit
Data available collected, but not fully, from reliable sources, improperly acknowledged, little evidence of any effort in reorganising data for presentation purposes (e.g., data copied and pasted as is spanning over one page, etc.), correct calculations made and presented but but not based on the formula as instructed and not showing full workings for all periods for either country, no assumptions or explanations given where necessary
2.5 to >0.0 pts
Pass
Data available collected, but incompletely, from reliable sources but without acknowledgement, hard to verify the source, data poorly presented or summarised, poorly reformatted, correct calculations but not throughout, not showing full workings for all periods for either country, no evidence of making any assumption or explanation where necessary
0.0 pts
Fail
Data collected from unverifiable sources (e.g., without source), no referencing made, data impossible to verify, poorly reformatted or presented, incorrect calculations, results without workings and impossible to verify correctness, no evidence of assumptions made where necessary
10.0 pts
Part 3
Conduct simple economic analysis based on calculated/collected bond yield and inflation data
10.0 to >7.5 pts
High Distinction
Strong evidence of economic analysis based on own analysis and expert opinions obtained from reliable external sources with proper acknowledgement
7.5 to >5.0 pts
Distinction
Strong evidence of economic analysis based on own analysis but little evidence of extensive reading or research to source expert opinions to back up arguments/statements
5.0 to >2.5 pts
Credit
Adequate evidence of using own data and calculations to conduct economic analysis (e.g., merely stating a comparison of two quantities without making any comment on the possible reasons for it, etc.), lacking in external reading or obtaining relevant market and economic news and expert opinions
2.5 to >0.0 pts
Pass
Adequate evidence of using own data and calculations to make comparisons but without any evidence of conducting any simple economic analysis, no evidence of obtaining external market and economic news to back up arguments or statements
0.0 pts
Fail
Missing comparisons or incorrect comparisons, no evidence of any comment or arguments in relation to differences
10.0 pts
Part 4
Collect real-world data and use previous findings to perform economic analysis of bond investments
10.0 to >7.5 pts
High Distinction
Full available data collected, properly referenced and clearly presented, strong evidence of economic analysis with arguments backed up by data as well as extensive external reading and research, demonstrating a mastery of major analytical concepts
7.5 to >5.0 pts
Distinction
Full available data collected and clearly presented but lacking in source/acknowledgement thus hard to verify, some evidence of economic analysis using own opinions and/or expert opinions, ECON1239 Principles of Finance: Assessment Task 2 Complete
5.0 to >2.5 pts
Credit
Data collected and clearly presented but incomplete, no referencing made for the data, little evidence of economic analysis using either own arguments or expert opinions
2.5 to >0.0 pts
Pass
Data collected but poorly presented and incomplete, improperly referenced made but clearly stating the source, no evidence of economic analysis beyond mere simple comparisons
0.0 pts
Fail
Little or no evidence of data collected, making comments on the data impossible to verify
10.0 pts
Part 5
Demonstrate a mastery of major analytical concepts relevant to the bond market
10.0 to >7.5 pts
High Distinction
Solid arguments based on relevant concepts and theories as covered in the course and beyond, arguments made based on own forecasting and predictions as conducted in previous parts, strong evidence of a mastery of the concepts in macroeconomy and bond markets
7.5 to >5.0 pts
Distinction
Solid arguments based on relevant concepts and theories, but arguments need clear evidence
5.0 to >2.5 pts
Credit
showing a clear understanding of Part 5
2.5 to >0.0 pts
Pass
Some evidence of the understanding of Part 5
0.0 pts
Fail
No evidence of the understanding of Part 5.
10.0 pts
Part 6
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Demonstrate a master of the relevant theories of the term structure of interests in discussing own results/interpretation.
10.0 to >7.5 pts
High Distinction
Demonstrate a mastery of the relevant theories, discussion showing strong and tight focus based directly on the data collected and analysed and the results documented in previous parts, strong evidence of extensive outside reading to back up arguments, ECON1239 Principles of Finance: Assessment Task 2 Complete
7.5 to >5.0 pts
Distinction
Demonstrate a good understanding of the relevant theories in the discussion, but lacking in extensive outside reading and focus
5.0 to >2.5 pts
Credit
Show a reasonable understanding of relevant theories, discussion lacking in focus as well as further outside reading
2.5 to >0.0 pts
Pass
Merely state a theory and its implications without using results documented in the previous parts for discussion, little evidence of any meaningful discussion
0.0 pts
Fail
Stating an irrelevant theory or merely copy and paste a theory without making use of it.
10.0 pts
Part 7
Demonstrate the ability to apply the knowledge and skills acquired from the course to make a well-informed judgement on an economic event
10.0 to >7.5 pts
High Distinction
Show a strong mastery of major analytical concepts from the course in making an informed judgement on an economic event, clear evidence of extensive outside reading or use of other expert opinions to back up own arguments as well as results/findings from previous parts
7.5 to >5.0 pts
Distinction
Demonstrate a good overall understanding of the techniques and concepts learned from the course, but lacking in extensive reading or use of other expert opinions to back up own arguments, no evidence of using previous findings or results in the discussion
5.0 to >2.5 pts
Credit
Demonstrate an adequate understanding of the quote but shows no effort in making use of findings or results documented from previous parts in the discussion or any outside reading or research or expert opinions
2.5 to >0.0 pts
Pass
Merely state a theory related to the economic event and make a general comment, no evidence of effort in outside reading or research or any expert opinions
0.0 pts
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Fail
Simply stating an agreement or disagreement with the quote and no evidence of any comment or argument for own opinion
10.0 pts
Part 8
Demonstrate a solid understanding of the relationship between the debt market and the stock market, and the implications from the bond data analysis for investors
10.0 to >7.5 pts
High Distinction
Show a strong understanding of the bond and stock markets and the implications for investors drawn from own analysis in the previous parts, clear evidence of making a conclusion summarising the overall findings from the whole assignment, ECON1239 Principles of Finance: Assessment Task 2 Complete
7.5 to >5.0 pts
Distinction
Show a good understanding of the bond market but lacking in a conclusive statement summarising the overall findings from the assignment
5.0 to >2.5 pts
Credit
Merely stating a bond investment versus a stock investment in general without making any reference to the analysis conducted so far
2.5 to >0.0 pts
Pass
Making a general statement about the stock market and the bond market, no evidence of findings or results documented throughout the assignment
0.0 pts
Fail
Barely discuss the findings or implications from the assignment for investors in the financial markets
10.0 pts
Total Points: 100.0