Business Finance Project Report

This project report covers topics such as yield curve, bond yield, expectations theory, spread between Australian Government Bonds and Treasury bonds, and more. It includes detailed graphs and tables to explain the concepts. The report is relevant for students studying Business Finance.

Running Head: Business Finance
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Project Report: Business Finance

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Contents
Question 1:........................................................................................................................3
Part a:............................................................................................................................3
Part b:............................................................................................................................3
Part c:............................................................................................................................3
Part d:............................................................................................................................4
Part e:............................................................................................................................5
Part f:............................................................................................................................5
Part g:............................................................................................................................7
Question 2:........................................................................................................................8
Part a:............................................................................................................................8
Part b:............................................................................................................................8
Part c:..........................................................................................................................10
Part d:..........................................................................................................................10
Part e:..........................................................................................................................10
Part f:..........................................................................................................................11
References:.....................................................................................................................12

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Question 1:
Part a:
Figure 1: Yield Curve
Part b:
In the normal circumstances, the shape of a yield curve is an upward slope because of
the face that the yield of short term debt is always lower than the yield of long term debt.
Part c:
The below yield curve shape explains the upward situation because of the short towards
the long term debt. All the given three curves depict the same outcome that the return from
the long term debt is always higher than the return from short term debt (Garlappi, Uppal and
Wang, 2007).

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Figure 2 Yield Curve
Part d:
two year's bond yield (2008)
Year-
1 Year-2
Actual
interest rate
Year 2
Actual
interest rate
Year -1
Expect
ed
Interest
rate
Jan-2008 6.83% 6.61% 1.1365 1.0683 1.0638
Feb-2008 7.12% 6.82% 1.1411 1.0712 1.0652
Mar-2008 7.03% 6.30% 1.13 1.0703 1.0558
Apr-2008 7.21% 6.33% 1.1306 1.0721 1.0546
May-2008 7.35% 6.60% 1.1364 1.0735 1.0585
Jun-2008 7.26% 6.97% 1.1442 1.0726 1.0668
Jul-2008 6.87% 6.64% 1.1372 1.0687 1.0641
Aug-2008 6.34% 5.83% 1.12 1.0634 1.0532
Sep-2008 5.63% 5.51% 1.1133 1.0563 1.0539
Oct-2008 4.33% 4.35% 1.0889 1.0433 1.0437
Nov-2008 3.09% 3.64% 1.074 1.0309 1.0419
Dec-2008 2.67% 3.07% 1.0624 1.0267 1.0347
two year's bond yield (2009)
Year-
1
Year-
2
Actual interest
rate Year 2
Actual interest
rate Year -1
Expected
Interest rate
Jan-2009 2.69% 2.83% 1.05741 1.0269 1.02971
Feb-2009 2.59% 2.80% 1.05685 1.0259 1.03017

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Mar-2009 2.74% 2.87% 1.05826 1.0274 1.03004
Apr-2009 2.69% 3.16% 1.06419 1.0269 1.03631
May-2009 2.87% 3.46% 1.07039 1.0287 1.04053
Jun-2009 2.95% 3.90% 1.07961 1.0295 1.04867
Jul-2009 3.00% 4.04% 1.08242 1.03 1.0509
Aug-2009 3.19% 4.57% 1.09349 1.0319 1.05968
Sep-2009 3.23% 4.42% 1.0904 1.0323 1.05628
Oct-2009 3.66% 4.82% 1.09877 1.0366 1.05998
Nov-2009 3.73% 4.71% 1.09645 1.0373 1.05702
Dec-2009 3.83% 4.54% 1.09282 1.0383 1.05251
Part e:
Expectations theory explains that the forward rates of a bond express about the
expected rates from the bond (Harvey, Liechty, Liechty and Müller, 2010). In case of the
given data, the 2008 bond has been compared with the 2009 bond and it has been measured
that huge changes have occurred into the expected and actual rates because of the demand of
the investors and the position of the market.
Figure 3: Comparison among actual and expected interest rates
Part f:
spread between Australian Government Bonds and Treasury bonds
F2 CAPITAL MARKET YIELDS - GOVERNMENT

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BONDS
Per cent per
annum
Australian
Federal
Government
NSW
Treasury
Difference
Years to
Maturity
Years to Maturity Years to Maturity
Date 3
yrs
5 yrs 10
yrs
3
yrs
5
yrs
10
yrs
3
yrs
5
yrs
10
yrs
Jan-2008 6.58 6.34 6.08 6.99 6.92 6.58 -
0.41
-
0.57
-
0.50
Feb-2008 6.75 6.50 6.29 7.33 7.26 6.96 -
0.59
-
0.76
-
0.67
Mar-2008 6.21 6.10 6.09 6.94 6.90 6.82 -
0.74
-
0.80
-
0.73
Apr-2008 6.25 6.19 6.17 6.89 6.84 6.78 -
0.64
-
0.65
-
0.61
May-2008 6.47 6.33 6.36 7.02 6.91 6.89 -
0.54
-
0.58
-
0.54
Jun-2008 6.84 6.69 6.59 7.36 7.23 7.10 -
0.52
-
0.54
-
0.51
Jul-2008 6.49 6.40 6.37 7.14 7.05 7.01 -
0.65
-
0.65
-
0.64
Aug-2008 5.74 5.77 5.86 6.35 6.38 6.49 -
0.62
-
0.61
-
0.63
Sep-2008 5.48 5.54 5.65 6.21 6.24 6.33 -
0.73
-
0.70
-
0.69
Oct-2008 4.59 4.83 5.22 5.27 5.48 5.85 -
0.68
-
0.65
-
0.63
Nov-2008 3.96 4.28 4.94 4.75 5.14 5.69 -
0.79
-
0.87
-
0.75
Dec-2008 3.43 3.72 4.22 4.54 4.87 5.12 -
1.10
-
1.15
-
0.90
Jan-2009 3.15 3.50 4.09 4.27 4.64 4.93 -
1.12
-
1.14
-
0.85
Feb-2009 3.08 3.59 4.25 3.96 4.50 5.21 -
0.88
-
0.91
-
0.95
Mar-2009 3.20 3.73 4.33 4.24 4.87 5.62 -
1.05
-
1.14
-
1.29
Apr-2009 3.53 4.05 4.51 4.32 4.93 5.59 -
0.79
-
0.88
-
1.07
May-2009 3.91 4.47 5.00 4.52 5.17 5.90 -
0.61
-
0.69
-
0.90
Jun-2009 4.47 5.10 5.56 5.02 5.70 6.36 -
0.55
-
0.59
-
0.81
Jul-2009 4.59 5.21 5.49 5.07 5.63 6.12 - - -

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0.48 0.42 0.63
Aug-2009 4.99 5.39 5.53 5.40 5.77 6.09 -
0.41
-
0.37
-
0.55
Sep-2009 4.82 5.14 5.32 5.12 5.54 5.86 -
0.31
-
0.40
-
0.54
Oct-2009 5.14 5.35 5.45 5.47 5.77 5.98 -
0.33
-
0.41
-
0.53
Nov-2009 4.99 5.24 5.47 5.34 5.67 6.05 -
0.35
-
0.43
-
0.58
Dec-2009 4.83 5.15 5.47 5.21 5.60 6.09 -
0.39
-
0.45
-
0.62
Part g:
On the basis of the given graph, it has been found that the NSW performance is better
than the Australian government bonds. The below pattern is negative because of the
deduction of the return of NSW government bonds from the Australian government bonds
(Fernández and Gómez, 2007).
Figure 4: spread between Australian Government Bonds and NSW Treasury bonds

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Question 2:
Part a:
The below graph explains the return of Qantas limited and AMP. The graph explains
that the QAN stock price is higher in current market. However, earlier the return from AMP
shares was higher.
Figure 5: Share price
Part b:
c ASX200
QAN.AX
($A)
AMP.AX
($A)
Jan-15
Feb-15 -0.63% -3.88% 7.96%
Mar-15 -1.72% 2.07% 8.65%
Apr-15 -0.22% 3.42% 3.83%
May-15 -5.51% -9.61% -10.23%
Jun-15 4.40% 9.80% 18.67%
Jul-15 -8.64% -9.98% -10.40%
Aug-15 -3.56% -6.55% 10.71%
Sep-15 4.34% 5.54% -0.29%
Oct-15 -1.39% 1.40% -7.85%

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Nov-15 2.50% 0.34% 12.36%
Dec-15 -5.48% -7.89% -5.13%
Jan-16 -2.49% -0.93% -0.52%
Feb-16 4.14% 8.83% 5.44%
Mar-16 3.33% 4.30% -20.88%
Apr-16 2.41% -4.08% -4.35%
May-16 -2.70% -8.51% -8.44%
Jun-16 6.28% 12.60% 12.06%
Jul-16 -2.32% -9.47% 2.53%
Aug-16 0.05% 3.04% -3.70%
Sep-16 -2.17% -13.45% 0.14%
Oct-16 2.31% 2.84% 7.84%
Nov-16 4.14% 7.23% 0.91%
Dec-16 -0.79% -0.79% 2.40%
Jan-17 1.62% -2.40% 9.97%
Feb-17 2.67% 9.16% 3.73%
Mar-17 1.01% 3.47% 11.07%
Apr-17 -3.37% -5.78% 18.16%
May-17 -0.05% 2.77% 14.17%
Jun-17 -0.02% 3.85% -6.99%
Jul-17 -0.11% -5.38% 7.52%
Aug-17 -0.58% -2.53% 1.92%
Sep-17 4.00% 2.90% 6.81%
Oct-17 1.03% 2.82% -7.80%
Nov-17 1.59% 1.57% -11.11%
Dec-17 -0.45% 1.16% 4.56%
Jan-18 -0.36% 0.76% 11.76%
Feb-18 -4.27% -3.05% -1.02%
Mar-18 3.88% -19.04% 0.16%
Apr-18 0.49% -3.47% 10.05%
May-18 3.04% -8.72% -2.99%
Jun-18 0.53% 0.00% 9.09%
ASX200 QAN.AX ($A)
AMP.AX
($A)
Mean 0.17% -0.87% 2.46%
Variance 0.10% 0.45% 0.77%
Standard
Deviation 0.032 0.067 0.088
Covariance 0.118% 0.061%

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The overall position of AMP stock is better because of the lower fluctuations in the
stock price.
Part c:
Bet calculations of both the stock are as follows:
ASX200 QAN.AX ($A) AMP.AX ($A)
Mean 0.17% -0.87% 2.46%
Variance 0.10% 0.45% 0.77%
Standard
Deviation 0.032 0.067 0.088
Covariance 0.118% 0.061%
Beta 1.172 0.610
Part d:
The beta value of QAN and AMP is 1.172 and 0.610. It explains that the beta
coefficient of AMP is lower than the QAN because of the lower volatility. As well as, the
beta coefficient of QAN is more than 1 which led to the conclusion that the volatilities in
QAN stock are even higher than the market index (Gapenski, 2008).
Part e:
QAN.AX ($A)
Calculation of cost of equity (CAPM)
Risk free rate (Bloomberg,
2018) 1.69%
RM 2.05%
Beta 1.172
Required rate of return 2.11%
AMP.AX ($A)
Calculation of cost of equity (CAPM)
Risk free rate (Bloomberg,
2018) 1.69%
RM 2.05%
Beta 0.610
Required rate of return 1.91%

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The calculations explain that the stock position of both the companies is underpriced in
the capital market.
Part f:
Introduction:
This report has been prepared to explain the performance of QAN and AMP.
Analysis:
The return of Qantas limited and AMP has been evaluated firstly in the report. The
calculations explain that the QAN stock price is higher in current market. However, earlier
the return from AMP shares was higher. The overall position of AMP stock is better because
of the lower fluctuations in the stock price (Higgins, 2012). It leads to the conclusion that the
AMP is better choice for the purpose of investment.
Further, the risk of both the stocks has been measured. The beta value of QAN and
AMP is 1.172 and 0.610. It explains that the beta coefficient of AMP is lower than the QAN
because of the lower volatility. Further, the required rate of return of QAN is higher.
However, the calculations explain that the stock position of both the companies is
underpriced in the capital market.
Conclusion:
This analysis leads to the conclusion that the investment must be done in the AMP
shares because of average return and risk position.

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References:
Fernández, A., and Gómez, S. 2007. Portfolio selection using neural networks. Computers &
Operations Research, 34(4), p.p. 1177-1191.
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial
management. Health Administration Press.
Garlappi, L., Uppal, R., and Wang, T. 2007. Portfolio selection with parameter and model
uncertainty: A multi-prior approach. Review of Financial Studies, 20(1), p.p. 41-81.
Harvey, C. R., Liechty, J. C., Liechty, M. W., and Müller, P. 2010. Portfolio selection with
higher moments. Quantitative Finance, 10(5), p.p. 469-485.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.