Posted: April 28th, 2016

Australian Commonwealth Government Securities

The major project is to be done in groups of 2. Each group will choose a set of
four on-the-run Australian Commonwealth Government Securities. Collect the key
characteristics of each of the bonds (coupon rate, maturity date) and bond yield data
as at the end of June 2015 (last working day) and the end of December 2015 (last
working day).
The bond data can be found on the RBA website (http://www.rba.gov.au) (you will
have to do some exploration of the site to find and understand what you are looking
for).
Required:
Part 1: (12 Marks)
A. Calculate the dirty price, clean price, modified duration and modified
convexity of the Government bonds as at the end of July 2015 and the end of
December 2015. (4 marks)
B. Calculate the holding period return for each of the bonds over the period from
July 2014 and the end of December 2015. (4 marks)
C. Calculate the modified duration, modified convexity for an equally-weighted
portfolio of the bonds at both dates and estimate the holding period return for
the portfolio over the 6-month period between the two dates. Report on your
findings. Compare and contrast the return and volatility of the portfolio and
the separate bonds at both dates. (4 marks)
(hint – the dirty prices you need for part A are found in an interim step in the
duration calculation, no need to calculate them separately).
Part 2: (12 Marks)
A. Use all available Government bond data (i.e. not just the bonds in your
portfolio) to construct and present a yield curve, spot curve and forward curve
as at the end of July 2015 and the end of December 2015. Your spot curve and
forward curve estimation should go out no more than 5 years. Present and
discuss your findings. (4 marks)
B. Review the predictive ability of the yield, spot and forward curves with
comprehensive reference to the relevant academic literature. Discuss the
curves that you have estimated in Part 2A with reference to this literature.
Does the July 2015 forward curve predict the 6 month spot rates at December
2015? Comment. (8 marks)