BAFI1005 Final Assessment S22021 PDF

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Final Assessment question...

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The final assessment comprises of four (4) questions. You are required to answer all four (4) questions. This assessment is worth a total of 50 marks, with marks for each question specified at the end of the question.

QUESTION 1 (THE INTEREST RATES) a) You are a senior financial analyst and have been asked to examine whether the global financial crisis and the COVID-19 affect financial and non-financial firms to the same extent? For the period beginning in 2006, plot the interest rates on three-month nonfinancial commercial paper (FRED code: CPN3M), three-month financial commercial paper (FRED code: CPF3M) and Treasury bills (FRED code: TB3MS). Compare the evolution of these interest rates.

[4 marks].

b) Market participants, including financial institutions, fund managers and corporations, must understand monetary policy setting impacts on economic activity and business cycle. A central bank will typically implement monetary policy settings in order to achieve certain economic outcomes over a business cycle. In order to forecast future economic conditions and business activity, business managers therefore need to understand the business cycle. Briefly describe the principal monetary policy objective of the Federal Reserve and give examples of different economic indicators that may give an insight into the future stages of a business cycle. [4 marks]

BAFI 1005 Financial Markets, Semester 2,2021

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QUESTION 1 (continued) c) Calculate the market price of each bond on 23rd April 2021 that issued by AAA Ltd., using the data provided in the table below. What is the current total value of minimum application? Time to Maturity 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 7 Yr 10 Yr

Issuer Issuing date Bond expiration date Face value Minimum application Interest rate Coupon rate (annual) Coupon payment Market Yield

U.S. Treasury Bond Yield 0.12% 0.14% 0.20% 0.25% 0.27% 0.46% 0.67%

Corporate Bonds Fact Sheet AAA Company Ltd. 23rd April 2021 25th April 2025 $ 1000 per bond. 50 Bonds ($ 50,000) Floating Interest Rate. The Interest Rate is the sum of the Market Rate plus the Margin. Central Government Bond Yield + 1.86% p.a. Annually (coupon payment is paid on 10th July every year) 4.00% [4 marks] (4 + 4 + 4 = 12 marks)

BAFI 1005 Financial Markets, Semester 2,2021

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QUESTION 2 (DERIVATIVE SECURITIES) a) A fund manager has been monitoring the performance of Virgin Galactic Corporation shares (NYSE: SPCE). The shares are currently trading at $34.8 on the New York stock exchange. The fund manager predicts that SPEC shares might rise in value over the next few months. He checked the market and found the related information on the options with a maturity of two months as below. Assume the number of underlying shares per contract is 100 shares. (i)

Please specify the moneyness of the following options. Are they in the money, at the money or out of the money? [3 marks]

Strike $30 $34.5 $38 (ii)

Call premium $3.05 $3.9 $3.2

Moneyness

Put premium $2.33 $4.5 $7.0

Moneyness

Which option would you suggest the fund manager to purchase? Why? [2 marks]

(iii)

How much would it cost if the fund manager purchases options in ii that cover 1,000,000 shares (ii)? [1 marks]

b) Company A agrees to enter into an FRA agreement with Company B in which Company A borrows $ 50,000,000 in 6-month time for a period of 9 months, and Company B invests $ 50,000,000 in 6-month time for a period of 9 months. The 6month interest rate is 0.75% per annum and the 9-month interest rate is 0.90% per annum. (i).

What is the interest rate that both companies agreed upon? [1 mark]

BAFI 1005 Financial Markets, Semester 2,2021

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(ii).

Suppose that at the expiry date of the FRA, the 6-month interest rate is 0.81% per annum and the 9-month interest rate is 0.96% per annum, calculate the compensatory payment and which party receives it? [2 marks]

QUESTION 2 (continued) c) An Australian mining company exports iron ore to other countries, such as China, South Korea and Japan. Its annual report states that the company is exposed to the risk of falling oil prices, increasing interest rates and exchange rates fluctuations of various foreign currencies. Discuss derivative products that can be used to hedge these risks?

[3 marks]

(6 + 3 + 3 = 12 marks)

BAFI 1005 Financial Markets, Semester 2,2021

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QUESTION 3 (CONTEMPORARY ISSUES IN FMs AND FUND MANAGEMET) a)

On April 7th, 2020, Fitch Ratings Inc. downgrades Australia's four biggest banks credit ratings. How does this affect borrowers, lenders, and financial institutions? What are the implications of this downgrade to the health of the financial system? [4 marks]

b) The following information on the performance of three funds A, B and C in Australia.

Average return (%)

Fund Market Risk-free rate Fund A Fund B Fund C (i)

?? ? 19.50 28.65 25.70

Standard deviation (%) – – 10.75 14.82 12.33

Beta – – 0.873 1.251 1.005

Use the data provided on Canvas to calculate the average annual return of the market (ASX/S&P200). Find a proxy for the risk free rate in Australia and explain your reasoning. [2 marks]

(ii)

Calculate the Coefficient of variation, Sharpe and Jensen Indices of performance for these funds and interpret the results. [6 marks].

c)

Obtain information on the following two funds: •

Colonial First State Imputation

•

Vanguard Emerging Markets Shares Index Fund

Compare the risks to investors presented by each of these fund and identify the types of investors that would favour these funds. [4 marks] (4 + 8 + 4 = 16 marks)

BAFI 1005 Financial Markets, Semester 2,2021

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QUESTION 4 (EQUITY CAPITAL MARKETS) a) Bharti Airtel plans to expand its network and prepare for the launch of 5G services. The board had approved raising up to ₹21,000 crore by issuing additional ordinary shares to its existing shareholders on a pro-rata basis of one new share for each fourteen equity shares of Bharti Airtel. The financial advisers to the corporation have recommended the use of an underwriting facility. Using this information, answer these questions.

(i)

What type of issue is Bharti Airtel making to its shareholders? What are the features of this type of issue? [3 marks]

(ii)

What is an underwriting facility, and why might Bharti Airtel use such a facility? [2 marks]

b) Rio Tinto Limited has decided to sell its shale coal part of the business by establishing a new limited liability company to be known as Shoal Limited. Shoal Limited will be a listed corporation on the ASX. Rio Tinto and Shoal decide to issue the new shares at $2.65.

(i)

Shoal Limited will be a limited liability company. What are the rights and financial obligations of shareholders that purchase shares in the company? [2 marks]

(ii)

One year later, Shoal Limited plans to expand its operations and seek to raise capital to do so. The company advisers recommend that the board of directors choose between a private placement or initial public offering. Explain each of these funding alternatives and discuss the advantages and disadvantages of each alternative. [3 marks] (5 + 5 = 10 marks)

BAFI 1005 Financial Markets, Semester 2,2021

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