Group research assignment (Weight 20%)
Due: May 25, 2014
Overview
The assignment provides students with an opportunity to work in a group and demonstrate their capacity to conduct research on a prescribed topic on an academic level and to critically evaluate key concepts and issues related to the topic. The assignment task is an opportunity for students to demonstrate evidence of broad and in-depth research on a chosen research topic:
§To clearly work out findings, and interpret and present them in a meaningful way.
§ To clearly structure thoughts and arguments and to put findings into the context of current debates in the field.
§To apply textbook tools to solve practical problems. § To present a written work in a professional manner.
§
Note: The assignment has two parts namely Part I and Part 2. Both parts are compulsory for each group. There are five questions in Part I. Each group has to attempt all questions in Part I. Part 2 requires writing an essay or a report on any of the three topics (options) described in section titled Assignment task Part 2.
Answers to Part I questions must be well organised and supported by workings. Detailed calculations must be provided. Submission showing answers only will not be marked. Math-type or MS-Equation Editor should be used to write equations where necessary. Only well researched attempts to Part 2 will be highly rewarded. Students are therefore expected to engage in in-depth academic research.
Three topics have been prescribed and a group has to choose any one of them. Each of the prescribed topics requires students to consult a variety of electronic resources, such as journal articles, books and the databases to which the UWS library subscribes. If you are unsure about the use of electronic resources, you should consult the liaison librarian by making prior appointment.
A group should consist of at least two students but the size must not exceed five in any case. Students should form the groups preferably with those enrolled in the same class by no later than Week 4 and inform the unit coordinator in written.
Submission requirements
Format
The assignment may be written in essay or report format. Students must be
familiar with these formats and follow the appropriate style of organising a
written work applicable to the chosen format. For example, if you choose the
report format, your written work must be organised like a report which includes
among others a table of contents, executive summary, introduction, analysis,
interpretation of results, recommendation etc. Similarly, if you choose the essay
format, you should be familiar with the organisation of an essay.
Minimum
In any case (whether it is organised as a report or an essay) the assignment
requirements
must satisfy the following requirements.
The assignment is attached to the appropriate coversheet. The coversheet can
be downloaded from the unit website. The coversheet must be signed by each
member of the group and show clearly their name and student ID. A submission
without Student ID will not be assessed. The assignment must be typewritten
and stapled.
Must be organised in the appropriate manner for example must have sections
such as introduction, analysis, results and interpretation, and finally a
conclusion.
Must follow the recommended (Harvard) referencing style. Sources of any
document, database, concept, definition etc. must be cited in the appropriate
manner.
Must provide a list of references. The list should include only those used or
referred to in the body of the assignment. Penalty applies for not providing the
list of references.
Page 1 of 9
Presentation
The assignment should be presented as follows:
Font/Font size: Times New Roman (preferred) /12, regular
Margin: (Left, right, top and bottom) 2.54 cm
Page numbers: yes
Line Spacing: 1.5
Paragraph Style: Justified
Referencing
The School of Business recommends the Harvard UWS referencing style.
Full details of referencing systems can be found at:
http://library.uws.edu.au/citing.php?arg=1&p=ofs
A full range of resources for searching and citing references is available at:
http://library.uws.edu.au/training.phtml
Student
Group assignment tasks must be done and submitted as a team. Free riders in
evaluation of
a group are identified by confidential evaluation by the fellow students in the
group member
group. The questionnaire for the evaluation is available on the unit webpage.
participation
Should a student have to say anything about his/her group mate; he/she can do
so by completing this questionnaire and submitting it confidentially to the unit
coordinator.
Note: This assignment task may not be feasible for undertaking individually. If you want to complete this task by your own, let the coordinator know. However, please be advised that doing the work individually will not be taken as a special case by any mean. The same marking criteria will apply regardless of whether it is completed individually or in a group.
Note: The unit coordinator will post assessment marks using theMy Grade function on the units vUWS site. For more comprehensive feedback, students should contact the coordinator to make an appointment.
Due: This assessment is due on Sunday, 25 May 2014 by midnight.
The assignment must be submitted online through the assignment drop box on the unit webpage. Submission by any other means may not be accepted. Please note that each group will be able to submit just one time. Do not drop the group member evaluation report into the assignment drop box. If you do so the link will disappear immediately and you will not be able to submit your actual written work. The group member evaluation report is a confidential document. Submission of this report is not compulsory. However, you can send the coordinator a report about your fellow members if you feel it is necessary.
Page 2 of 9
Details: Part 1
This part of the assignment task is compulsory. There are five questions in this part. Each group must attempt these questions. Each question is worth 10 marks and the weight of this part of the assignment is 50 per cent of the total marks (20) allocated to group assignment. Detailed calculations must be provided. Submission showing answers only will not be marked. Use math-type or MS -Equation Editor to type equations where necessary.
Question 1 A 5-year bond with face value of $1000 makes annual coupon payments of $80
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and is currently selling at par. Calculate the return you will earn if you buy the
-10 Marks
bond now and sell it at the end of the current year when bond is expected to
have a yield to maturity of 6 per cent.
(10 marks)
Question 2
Table 2.1 is an excerpt of MM Banks balance sheet. Use the balance sheet
-30 Marks
information and the notes underneath to answer questions 2a through 2c.
Table 2.1: Excerpt of the balance sheet of MM Bank Limited.
Assets
Au$
Liabilities
Au$
2-year
175,000
1year CD
135,000
Treasury
Bond (TB)
15-year
165,000
5-year Deposits
160,000
Corporate
Bond (CB)
Note: Interest rates are currently as under:
2
-year TB
5% p.a.
15-year CB
9% p.a.
1
-year CD
4.5% p.a.
5-year
8%
Deposits
Assume that all instruments are currently selling at par (equal to book value) and that the frequency of interest payment is once a year for all instruments.
a. Fill Table 2.2 to show the impact on the Banks equity of a 2% change in all interest rates. Provide working below the table.
(15 marks) Table 2.2: Impacts on equity for a 2% change in the interest rates.
Particulars
Book Value (au$)
Value when interest
% change in value due
rate increases by
to change in interest
2% (au$)
rate
2-Year TB
175,000.00
15-Year CB
165,000.00
A. Total
340,000.00
Assets
1-Year CD
135,000.00
5-Year
160,000.00
Deposits
B. Total
295,000.00
Liabilities
Equity (A-B)
45,000.00
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Page 3 of 9
Question 2
b. Calculate duration at the current rate of interest (see notes under Table
continued
2.1) of each instrument, the weighted average duration of assets and
liabilities, and the weighted average maturities of assets and liabilities,
and the duration and maturity gaps. Insert your results in the marked
(????) cells of Table 2.3. Show workings under the table.
(10 marks)
Table 2.3: Maturity and Duration Gap
Particulars
Book Value
Duration
Weighted
Maturity
Weighted
(Au$)
(year)
Average
(year)
Average
Duration
Maturity
(year)
(year)
2-Year TB
175,000.00
????
2
15-Year CB
165,000.00
????
15
Total Assets
340,000.00
????
????
1-Year CD
135,000.00
1
1
5-Year
160,000.00
????
5
Deposits
Total
295,000.00
????
????
Liabilities
Maturity Gap
????
Duration
????
Gap
c. What do the gap estimates say about the Banks exposure to the interest
rate risk? What is the economic interpretation of the duration gap?
(5 marks)
Question 3
An insurance company issued a $90 million 1-year note at 8 per cent add on
– 20 Marks.
annual interest (paying one coupon at the end of the year) and used the
proceeds to fund a $100 million face value 2-year commercial loan at 10 per
cent annual interest. Immediately after these transactions were
(simultaneously) undertaken, all interest rates went up 150 basis points.
a. Use the duration model to estimate the change in the value of the loan
due to the increase in the interest rate.
(5 marks)
b. Find the exact change in the value of the loan using the valuation
formula.
(5 marks)
c. Contrast the results obtained in (a) and (b). There is obviously a
difference in the results. Explain what makes this difference and how the
difference can be corrected. Show all workings and calculations.
(10 marks)
A firm is issuing a two-year debt in the amount of $200,000. The current market
Question 4
– 20 Marks.
value of the assets is $300,000. The risk-free rate is 6 per cent, and the
standard deviation of the rate of change in the underlying assets of the
borrower is 10 per cent. Using Mertons model, determine the following:
a. The current market value of the loan, and
(10 marks)
b. The risk premium to be charged on the loan.
(10 marks)
