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1) You are a senior financial analyst and have been asked to analyse recent developments in the Euro era and the U.S markets and advise the top management on the economic conditions in both markets. You have collected data on the euro area yields of the central government bonds and the U.S. treasury bond yields. For this purpose, you have downloaded the following data from the European Central Bank and the U.S Federal Reserve Bank on 23rd April 2021 (Mo = month, Yr = Year):
23/04/21
Time to Maturity Euro area Central Government Bond Yield Rates U.S. Treasury Bond Yield Rates
1 Mo – 0.08%
3 Mo -0.50% 0.10%
6 Mo -0.62% 0.11%
1 Yr -0.65% 0.12%
2 Yr -0.70% 0.14%
3 Yr -0.74% 0.20%
4 Yr -0.74% –
5 Yr -0.72% 0.27%
7 Yr -0.63% 0.46%
10 Yr -0.51% 0.67%
20 Yr -0.17% 1.19%
30 Yr -0.05% 1.40%

a) Considering both yield rates on 23rd April 2021, depict the yield curves charts and describe the implied market outlook in the Euro area and the U.S. market to the top management.

b) Calculate the market price of each bond on 23rd April 2021 that issued by North Polar Ltd., a European company specialises in manufacturing semiconductors, using the yield curve data provided in the table above. What is the current total value of minimum application?

Corporate Bonds Fact Sheet
Issuer North Polar Ltd.
Issuing date 23rd April 2021
Bond expiration date 25th April 2025
Face value € 1000 per bond
Minimum application 50 Bonds (€ 50,000)
Interest rate Floating Interest Rate. The Interest Rate is the sum of the Market Rate plus the Margin
Coupon rate (annual) Central Government Bond Yield + 1.86% p.a.
Coupon payment Annually (coupon payment is paid on 10th July every year)
Market Yield 4.5%

c) Provide two examples of changes in the market for loanable funds that can result in a change in the level of interest rates. Explain how and why the interest rate changes based on the loanable fund theory.

2) You have just received a bonus of $15,000 and are looking to deposit the money in a bank for 4 years. You have investigated the annual deposit rate of several Australian banks and collected the following information:

Bank Annual rate Compounding frequency
Commonwealth Bank of Australia 0.50% Monthly
Westpac Banking Corporation 0.90% Quarterly
Australia and New Zealand Banking Group 0.75% Daily
National Australia Bank 0.80% Annually

a) To determine which bank you should deposit your money in, calculate how much money you will earn at the end of 4 years at each bank. (round your answer to 2 decimal places).

b) You understand that the more frequently interest is earned in each year, the more you will have at the end of your investment horizon. Is this always true? Discuss this statement considering your answer from the previous part.

c) A professional footy player and his agent are evaluating three contract options to play in the Australian Football League (AFL). Each option offers a signing bonus and a series of payments over the life of the contract. The player uses 7.25% rate of return (compounded annually) to evaluate the options. Using the information provided below, which contract should be chosen? (Show your calculations)

Year Cash Flow Richmond Football Club Hawthorn Football Club Collingwood Football Club
0 Signing Bonus $3,000,000 $3,000,000 $3,000,000
1 Annual Salary $700,000 $800,000 $750,000
2 Annual Salary $750,000 $800,000 $775,000
3 Annual Salary $800,000 $750,000 $775,000
4 Annual Salary $850,000 $700,000 $775,000

3) 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.

a) Please specify the moneyness of the following options. Are they in the money, at the money or out of the money?

Strike Call premium Moneyness Put premium Moneyness
$30 $3.05 $2.33
$34.5 $3.9 $4.5
$38 $3.2 $7.0
b) Which option would you suggest the fund manager to purchase? Why?

4) 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 6- month interest rate is 0.75% per annum and the 9-month interest rate is 0.90% per annum.

a) What is the interest rate that both companies agreed upon?

b) 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?

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?

5) 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?

Type Of Service: Math/Physic/Economic/Statistic Problems
Type of Assignment: Calculation
Subject: Not defined
Pages / Words: 12/3300
Number of sources: N/A
Academic Level: Freshman(College 1st year)
Paper Format: N/A
Line Spacing: Double
Language Style: AU English

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