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Fixed-Income Analysis - Strucutured Response - Accounting and Finance Assessment Answer
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Internal Code: 1AIEDA
Figure 1. Bloomberg screen for an Apple Inc. fixed-income security.
In your assignment, up to 30 additional marks can be achieved by addressing the following criteria, which will be applied to the assignment as a whole. Please refer to the course rubric for the definition of each marking category.
Accounting and Finance Assessment Answer
Assignment Task: In this assignment, you are asked to perform a range of calculations and evaluations related to the material covered in the course. Most of the tasks are related to the valuation and analysis of a particular bond. The maximum mark for the assignment is 100 marks. Task 1 The following Bloomberg screen presents Apple Inc. fixed-income security for you to evaluate. In the first task of your assignment, answer the following questions.
Figure 1. Bloomberg screen for an Apple Inc. fixed-income security.
- Provide a brief description of the security, including a) type of the security, b) maturity date, c) coupon rate and frequency, d) seniority ranking, e) credit rating, f) spread at issue, and g) par value. (3.5 marks)
- Calculate the above security’s full price, clean price and accrued interest as of the date of the screen (22 Aug 2016) assuming the yield to maturity of 1.19%. Show calculations. (6 marks)
- Current (annualised) US Treasury spot rates are as follows:
- Assuming that Z-spread is equal to 40 basis points, calculate the bond’s arbitrage-free price. Show calculations
- If the bond is bought today at the arbitrage-free price and sold on 2 Aug 2018 at $100.00, what will be realised the rate of return on a bond, if no reinvestment of coupons is assumed? Show calculations.
- From the US treasury spot rates above and assuming Z-spread of 40 basis points, calculate appropriate discount rates (implied spot rates) for this bond’s cash flows. Show calculations.
- Using bond-specific spot rates you calculated in Question 5, derive six-monthly forward rates, including six- months forward rate 6 months from now - 0.5f0.5, six-month forward rate 12 months from now - 1f0.5, and six-months forward rate 18 months from now - 1.5f0.5 for the bond. Show calculations.
- Estimate the bond’s arbitrage-free price using forward rates calculated in question 6 and comment on the comparability of spot rate and forward rate pricing Show calculations.
- There is another Apple Inc. 2.5 year semi-annual 2% coupon paying a bond in the market priced at $101.5. Using bond-specific spot rates as calculated in Question 5 (for 0.5 years, 1 year, 1.5 year and 2 years), bootstrap 2.5-year spot rate for the bond. Show calculations.
- Estimate the original bond’s (displayed in Figure 1) Macaulay Duration and Convexity (YTM is as, in Q2, the valuation date is 2 Aug 17). Show calculations.
- Estimate the original bond’s (displayed in Figure 1) Approximate Modified Duration and Approximate Convexity by applying 10bp interest rate shock to annualised yield to maturity (YTM is as, in Q2, the valuation date is 2 Aug 17). Show calculations.
- Assume the following interest rate tree
- Calculate the value of the (option-free) bond using the binomial model.
- Assume the bond is callable on 2 Aug 2018 and 2 Feb 2019 at $100.00, calculate the value of the bond.
- Calculate the value of the call option and comment on who bears the cost of the call option.
- Use the statements to calculate the following measures for the last five financial years
- EBITDA
- FFO
- FCF before dividends
- FCF after dividends
- Debt/capital
- Debt/EBITDA
- FFO/debt
- FCF after dividends/debt
- EBITDA/interest expense
- EBIT/interest expense.
- Profitability and cash flows
- Leverage
- Coverage
- Estimate the value of fortnightly mortgage payments from the pool
- Suppose that the servicing fee is 0.5%, fill in the following table
In your assignment, up to 30 additional marks can be achieved by addressing the following criteria, which will be applied to the assignment as a whole. Please refer to the course rubric for the definition of each marking category.
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