Assessment Task 2 – Research Report (Individual Assignment)
Assessment Task 2 comprises a paper of about 2,000 - 2,500 words (or 8-10 pages 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 due date for this assessment task is specified on the Canvas course site.
Task in Brief:
“You are a bond analyst working for a fund. 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 hence, the analysis for the assignment should be done separately.
Bond market data and other relevant data from reliable sources:
Assessment 2 constitutes 40% of the total marks for BAFI3258. Students are required to complete this assignment.
The allocation of marks will be divided among the following areas: (1) General and Presentation, (2) Range and accuracy of calculations and collected data, (3) Economic
analysis and interpretation of results and findings, including original contribution.
A Rubric Marking:
Marking Guide lists specific points under each of these three categories is provided on Canvas for the assessment of your assignment. This should be used as a guidance in the preparation of your assignment.
2,000 - 2,500 words, typed 12 pts, Times New Roman font type, A4-sized pages.
Submit your Assessment Task 2 to “Assignments” via Canvas
Please consult the Appendix (see the below) 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. Please read through the following instruction carefully.
IMPORTANT: You are required to choose TWO countries: the USA and ONE other country from below list (in alphabetic order)
You are required to collect the most recent bond market data, namely, yield to maturity (YTM), 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).
Collect the YTMs 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.
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”) (future interest rates) that the bond markets appear to consider appropriate over the following periods (see the Appendix):
Show all your detailed workings for at least one country, i.e., either for the US or for the country of your own choosing, or both (to be included in the Appendix of your submission). Present your calculated DRs clearly and neatly in a properly formatted table.
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 DRs and these inflation rates to predict the REAL rates of interests for those periods based on the following formula:
For the 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 or that the predicted inflation rates are calculated based on historical rates.
You are required to JUSTIFY your assumptions.
Show all your detailed workings in an Appendix.
Use your results to compare the predicted future interest rates (DRs) between the USA and your selected country. Make sure that you use your own economic analysis of your results and/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. If you use any other expert opinions from such sources as financial newspapers or statements by some central banks, make sure to quote the source properly.
Use your forecasting results in previous parts to make comments on the US market and the rates on TIPS (Treasury Inflation-Protected Securities).
Comment on how the YTMs of Treasury bonds have changed since July 1st, 2021, e.g. how does the bond market appear to have changed its predictions? You will need to collect and present the YTMs of the Treasury bonds that you have selected and fill out the table below. Please present the data for current bond rates, as well as the bond rates on July 1st, 2021
Use the relevant theories of the term structure of interest rates to discuss how they affect your interpretation/results/findings.
In the light of your findings, discuss the following comments from Dr Jeromy Powell, Chair of Federal Reserve Bank in relation to the Federal Reserve Bank’s monetary policy (i.e., please discuss the implications of Fed’s decision on inflation expectation, Treasuries’ real rate of return and the Treasury yield curve):
8 March 2023.
“We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. In light of the cumulative tightening of monetary policy and the lags with which monetary policy affects economic activity and inflation, the Committee slowed the pace of interest rate increases over its past two meetings. We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation.”
Discuss how you see the implications of your findings for the equity markets (specifically, the implications on equity valuation and the sector rotations for equity performance).