How is duration related to interest elasticity of a fixed income security?

Investments and Portfolio Management

Assessment Task 2: Individual Written Assignment
Assessment Details;

Students are required to submit answers to all of the following questions. Questions 3 and 4 can be solved manually or by using Microsoft Excel

Question 1 (8 marks)

An increasing number of investors are looking for greater control over their superannuation. Combined with effects of the introduction of Future of Financial Advice regulation and a prolonged low interest rate environment, it has resulted in a level playing field for managed funds and investment vehicles such as listed investment companies ( LICs)

You are required to compare listed investment companies (LICs), exchange traded funds (ETFs) and managed funds in terms of:

· Structure

· Investment strategy

· Trading ( buying/selling)

· Liquidity

· Pricing

· Transparency


Question 2 (8 marks)

How is duration related to interest elasticity of a fixed income security? What is the relationship between duration and the price of a fixed income security?

Question 3 (12 marks)

Consider a $1,000 Treasury bond paying a semi-annual coupon of 10 per cent p.a. and currently selling at par in the secondary market, and with a maturity date of 11 years.

(a) What is the duration, modified duration and dollar duration of this bond?

(b) What will be the estimated price change on the bond if interest rates increase by 0.10 per cent (10 basis points)? If interest rates decrease by 0.20 per cent ( 20 basis points)?.

(c) What would be the actual price of the bond be under each interest rate change in part (b) using the traditional present value bond pricing techniques? What is the amount of error in each case? Why does this error occur?

Question 4 (12 marks)

Blue Sky Limited has just paid a dividend of 20 cents per share. Investors require a 16 per cent return from investments such as this. If the dividend is expected to grow at a steady 8 per cent per year, what is the current value of each share? What will the shares be worth in 5 years?

Now assume that the dividend is expected to grow at 20 per cent for the next 3 years and then settle down to 8 per cent per year. What price would the share sell for today?

Task assessor.


Suggested time to devote to this task.

Approximately 20 hours outside of class time.

Submission details

This assignment is to be submitted using the Moodle assignment submission system. If you use Excel, copy and paste the relevant Excel tables, graphs and comments into a Word document.

The assignment should be handed in as an electronic copy of the completed Word document.. Do not submit the Excel file in which you completed your workings.

Transfer all the results to MS Word.

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