Topic: Bond Portfolio Project-Fixed Income Analysis

Project Details
Length
The project should be about 1500 words and no more than 5 pages including graphs and tables
Portfolio Constraints
You must choose your portfolio from the 23 Treasury bonds (ranging from TB 124 to TB 150). You can engage, if you wish to, in limited short selling. Five bonds only can have a negative weight of up to -10%. You can exclude individual bonds from your portfolio by specifying a zero weighting. However, you are required more than least a 10% weight allocated to 5 individual bonds. Naturally, the sum of all of your weights must equal 100%.
You must also comply with a risk constraint. Your portfolio DV01 (BPV) must be greater than $3,000 but must not exceed $12,000 per basis point (See cell I28).
Devising a Bond Portfolio Strategy
As with the simulation exercise, you need to anticipate changes in the term structure of interest rates in order to optimise your portfolio performance over the investment period. Naturally, it is up to you what strategy/bond weightings you choose. However, you will need to justify your choice of weights in your final report.
Rebalancing Your Portfolio
With such a short investment period, I don’t expect that you will need to rebalance your bond weights during the period. However, if feel that rebalancing is necessary, email me your new weight set. The new weight set will be applied from the date of your
email. Frequent rebalancing will not improve your grade.
Daily Data Collection
You require daily data on the yields of Australian Treasury bonds in order to calculate daily return for your fund. This data can be found both contemporaneously and
historically from the RBA
http://www.rba.gov.au/statistics/tables/index.html#interest_rates (table F16).
Please note the the yield data for each bond for the entire investment period will be published on Canvas at the end of the period.
Portfolio Administration Workbook
You will use the PortfolioAdministration workbook to manage your portfolio and to calculate daily return.
The input in cell N3 is an index of the daily data. An entry of 0 in N3 returns the starting yields. An entry of 1 in N3 provides day 1 yields and portfolio value etc.
Data clipped from RBA F16 is pasted into the data section range beginning top, left T3 (date in U7, yield data in columns V to AR). Note that the workbook currently contains some prior data in the range U5:AR27. This data will need to be replaced by data taken from the F16 workbook and posted on Canvas.
If you wish to use the YieldDrawingCurve worksheet you will need to install the dll (See installing the dll document). However this is not essential.
A Benchmark Portfolio
You will need to construct a bond benchmark portfolio with which to compare your chosen fund. For the purpose of this project your benchmark will consist of an equally weighted portfolio (this is the default portfolio in the workbook).
Project Elements
As stated above the project consists of three sections. Each of these sections should be approximately equal length (a page or so)
8/05/2020 < Start date Value > 10,000,000 Length => 0.93% 0 <=Date Index 8/05/2020 <=Date -95.65% Bond No. Indx Coupon Maturity Term Yield Price ModDuration BPV Convexity Quantity Value Weights Yield Change Price Coupon Value 1 TB 124 5.75% 15-May-21 1.02 0.790% 104.9149 1.00 44 1.51 4,144.15 434,783 4.35% 0.790% 0.00% 104.9149 – 434,783 2 TB 151 2.00% 21-Dec-21 1.62 0.755% 102.7604 1.59 69 3.34 4,231.03 434,783 4.35% 0.755% 0.00% 102.7604 – 434,783 3 TB 128 5.75% 15-Jul-22 2.19 0.725% 112.6821 2.05 89 5.41 3,858.49 434,783 4.35% 0.725% 0.00% 112.6821 – 434,783 4 TB 153 2.25% 21-Nov-22 2.54 0.725% 104.8693 2.45 106 7.35 4,145.95 434,783 4.35% 0.725% 0.00% 104.8693 – 434,783 5 TB 133 5.50% 21-Apr-23 2.95 0.740% 114.1360 2.76 120 9.31 3,809.34 434,783 4.35% 0.740% 0.00% 114.1360 – 434,783 6 TB 137 2.75% 21-Apr-24 3.96 0.785% 107.7622 3.76 164 16.44 4,034.65 434,783 4.35% 0.785% 0.00% 107.7622 – 434,783 7 TB 139 3.25% 21-Apr-25 4.96 0.840% 111.8198 4.61 201 24.48 3,888.24 434,783 4.35% 0.840% 0.00% 111.8198 – 434,783 8 TB 142 4.25% 21-Apr-26 5.96 0.900% 119.5741 5.35 233 33.20 3,636.09 434,783 4.35% 0.900% 0.00% 119.5741 – 434,783 9 TB 136 4.75% 21-Apr-27 6.96 0.960% 125.6548 6.08 265 43.11 3,460.14 434,783 4.35% 0.960% 0.00% 125.6548 – 434,783 10 TB 148 2.75% 21-Nov-27 7.54 1.005% 113.9102 6.79 296 52.69 3,816.89 434,783 4.35% 1.005% 0.00% 113.9102 – 434,783 11 TB 149 2.25% 21-May-28 8.04 1.035% 110.3897 7.32 319 60.51 3,938.62 434,783 4.35% 1.035% 0.00% 110.3897 – 434,783 12 TB 152 2.75% 21-Nov-28 8.55 1.060% 115.0338 7.61 331 66.03 3,779.61 434,783 4.35% 1.060% 0.00% 115.0338 – 434,783 13 TB 138 3.25% 21-Apr-29 8.96 1.075% 118.6694 7.90 344 71.18 3,663.82 434,783 4.35% 1.075% 0.00% 118.6694 – 434,783 14 TB 154 2.75% 21-Nov-29 9.55 1.085% 116.3211 8.40 366 80.67 3,737.78 434,783 4.35% 1.085% 0.00% 116.3211 – 434,783 15 TB 155 2.50% 21-May-30 10.04 1.100% 114.4283 8.88 386 89.60 3,799.61 434,783 4.35% 1.100% 0.00% 114.4283 – 434,783 16 TB 157 1.50% 21-Jun-31 11.13 1.135% 104.3723 10.19 443 114.68 4,165.69 434,783 4.35% 1.135% 0.00% 104.3723 – 434,783 17 TB 158 1.25% 21-May-32 12.04 1.170% 101.4759 11.09 482 134.88 4,284.59 434,783 4.35% 1.170% 0.00% 101.4759 – 434,783 18 TB 140 4.50% 21-Apr-33 12.96 1.180% 139.9803 10.41 453 128.60 3,106.03 434,783 4.35% 1.180% 0.00% 139.9803 – 434,783 19 TB 145 2.75% 21-Jun-35 15.13 1.310% 120.7377 12.55 546 183.07 3,601.05 434,783 4.35% 1.310% 0.00% 120.7377 – 434,783 20 TB 144 3.75% 21-Apr-37 16.96 1.390% 135.7098 13.28 578 210.47 3,203.77 434,783 4.35% 1.390% 0.00% 135.7098 – 434,783 21 TB 147 3.25% 21-Jun-39 19.13 1.495% 130.3255 14.79 644 263.23 3,336.13 434,783 4.35% 1.495% 0.00% 130.3255 – 434,783 22 TB 156 2.75% 21-May-41 21.05 1.585% 122.0469 16.33 711 319.67 3,562.42 434,783 4.35% 1.585% 0.00% 122.0469 – 434,783 23 TB 156 2.75% 21-May-41 21.05 1.690% 119.9758 16.27 708 318.13 3,623.92 434,783 4.35% 1.690% 0.00% 119.9758 – 434,783 Averages and Totals 9.32 1.067% 7.89 7,895 97.28 10,000,000 100.00% 0.00% New value=> 10,000,000
Choosing Your Portfolio
You must devise a clear strategy for choosing your particular portfolio. This strategy must be based on your assessment of how the yield curve will change over the next month. This assessment will based on knowledge of where the yield curve is at present and your, and other experts, view of the forces of change acting on the level and shape of the term structure of interest rates.
Please note the YieldCurveDrawing worksheet in the PortfolioProjectAdministration
workbook to assist with strategizing and writing up your report. Note however that this will only work if you have the FIA.dll installed. (See
You need research contemporaneous opinion on the subject of Australian interest
rates. The following sites should provide some useful leads:
Reserve Bank www.rba.gov.au
AFR www.afr.com
The Australian www.theaustralian.com.au/business/markets
The Yield Report http://www.yieldreport.com.au/
Trading Economics https://tradingeconomics.com/australia/interest-rate
This first section of your report should include a comparison of the properties of your chosen portfolio compared to the properties of the benchmark portfolio. Deviations in the characteristics of your portfolio away from the benchmark should be consistent with your overall strategy.
Note that while you are not required to explicitly set out the rationale for your portfolio choice at the time of the commencement of the investment period, you will need to provide a detailed rational for your portfolio choice in your final report so make you choice wisely with the participation of all group members.
Tracking the Fund over the Investment Period
Your report will include a section showing how daily fund value and fund return tracked over the month long investment period. Cell R3 shows running return from the
beginning of the investment period. Cell R28 shows the value of the fund at any given date. You can calculate daily return from changes in portfolio value from day to day.
This section should include charts showing relevant changes in value and return for both your fund and the benchmark fund.
Evaluating Fund Performance over the Investment Period
Average daily return is an important metric of fund performance. However, risk must also be a consideration in judging the performance of your fund. You should annualise the average daily return figure by multiplying the daily average by 365. The standard deviation of daily return can be annualised by multiplying by
365 .
In this section you should provide a rational for your fund’s success or failure, both absolutely and relative to the equally weighted benchmark.
Getting Started
You need to meet with your group as soon as possible to discuss a process of deciding on an interest rate strategy and ultimately choosing a portfolio to submit. You should start researching contemporary opinion on future short-term interest rate movement.
Your group needs to meet several times, prior to finalising on a set of weights and emailing me the weights by the deadline specified above
Marking Guide
The marks for the assignment will be weighted as follows

  1. Rationale for your bond strategy undertaken (10 marks)
  2. Bond portfolio tracking and performance analysis and summary remarks (10
    marks)
  3. Written and graphical presentation (5 marks)
    Final marks will be pro-rated to sum to 20% .

Type of assignment: Academic paper writing
Type of assignment: Report
Subject: Finance
Pages/words: 6/1650
Number of sources: 10
Academic level: Bachelor
Paper format: Harvard
Line spacing: Double
Language style: AU English

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