Q1. Bond price, yield and duration exercises

Go to the London Stock Exchange’s bonds’ website

http://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/retail- bonds-search.html

Choose 3-4 bonds. Fixed coupon rate bonds only. (25 marks)

Required:

(a) Verify that the price is right with the given yield and coupon.

(b) Calculate their durations.

(c) Using your cases to support the statements that:

Bonds with the coupon rate < YTM will be priced at a discount;

Bonds with the coupon rate > YTM will be priced at a premium;

Bonds with the coupon rate = YTM will be priced at the face value.

(d) Verify that:

Other things being equal, bonds with a higher coupon rate have a shorter duration; Other things being equal, bonds with a higher YTM have a shorter duration;

Other things being equal, bonds with a longer time to maturity have a longer duration.

Note:  if you have difficulties in finding a pair of two bonds that are equal in maturity and YTM or coupon rate, it is acceptable that one of the bonds is real while the other is hypothetical.

Q2. VaR exercises

Download returns on two or more stocks from yahoo finance or other sources. The data can be from any markets. (25 marks)

Required:

(a) Estimate their VaR with different criteria and different investment horizons.

(b) Using your cases to verify that:

Higher VaR losses with higher volatilities, other things being equal;

Higher VaR losses with tighter criteria, other things being equal.

Requirements for c1:

Provide all the data and workings with excel. Write in word a narrative for each of the

questions that summarises your results with pertinent analysis. The guideline for the length of a narrative is 200 words ± 25%. Printing/reporting numbers only without analysis, interpretation and explanation will earn no marks.

Coursework c2

Q3. Outline the theoretical assumptions and implications of the Capital Asset Pricing Model (CAPM).

(500 words approximately) (15 marks)

Q4. Briefly outline the background and important features of the Fama French three factor model. (10 Marks)

Q5. Carry out an empirical test of the CAPM using the excel file ‘Fama French’ on Moodle, downloaded from Ken French’s website, as follows:

Download monthly return data of two stocks of your choice, beginning June 2018 and ending May 2023

Using the excess return model: Rpt  −  Rft   =  a +  β * (Rmt  −  Rft) +  εt

Test: H0  : a = 0 (25 marks)