Investment Strategies

INVESTMENT STRATEGIES
INVESTMENT STRATEGIES
NAME OF STUDENT
NAME OF UNIVERSITY

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INVESTMENT STRATEGIES
Question 1.Annualised interest rate for zero coupon bonds and t-
bills
We will first calculate the intest payable by first calculating the
cuurent value of the bond. Interest is payable semi annually on bonds
and bills
Solution steps.
Step 1. How to find the current price of the bond
(Budgeting.thenest.com, 2019).
P = M / (1+r)n
where:
P = Current price of the bond
M = maturity value (We will use 100 for this case) .
r = investor's required annual yield / 2 (adjusted for semi annual
interest payments)
n = number of years until maturity x 2
a) Zero coupon rate
Interest on a one year zero coupon bond at a rate of 4,2%. Interest rate
will not change and interest earned in the first six months will not be
reinvested. Interest is payable over two times per year.
Calculation of interest on the face value.
Interest rate /100 x face value
4,2/100 *100= 4,2
Interest for the whole year is 4,2 ,divided by 2 to get the semi annual
rate is 2,1.
Annualised interest will be the compounded interest of the two
periods.
= ((1+0,021) X(1+0,021)) -1 = 0,021 or 2,1% per period or 4,2% per
year.
b) 6 month rolling strategy for the t-bill.
Using the 6 month roll over strategy at an interest rate of 4%.
Calculation of interest on the face value.
Interest rate /100 x face value
4/100 *100= 4
Interest for the whole year is 4 ,divided by 2 to get the semi annual
rate is 2.
The second six months the interest rate will be 5 ,divided by 2 =2,5%.
Annualised interest will be the compounded interest of the two
periods.
= ((1+0,02) X(1+0,025)) -1 = 0,0455 or 4,6% per year.

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INVESTMENT STRATEGIES
c) If interest changes by a reduction of 1%.
Interest recievable if we reduce the rates by 1%
When interest rates reduce by 1% ,the only impact will be on the
rollover stategy for the last six month period. The new interest rate
will be (4-1)=3%
The interst eared on zero cuopun bond will not be affected by changes
in intret rates.
The second six months the interest rate will be
3 ,divided by 2 =1,5%.
Annualised interest will be the compounded
interest of the two periods.
= ((1+0,02) X(1+0,015)) -1 = 0,0353 or 3,5%
per year.
Rate of interest returns summarised
At 4,2% and 4% interest rates Annualised rate of return.
Zero coupon bond 4,2%
Rollover strategy and an increase of
1 % in the second half of the year. 4,6%
With a 1% reduction on interest rate
Zero coupon bond 4,2%
Rollover strategy 3,5%
The rollover strategy is very responsive to the changes in interest rate.
Question 2
a. Technical analysis application.
Technical analysis is a concept in investments and trading whose
basis is that past price activity trends like volumes and prices can be
used to predict current and future price movements of a stock or
commodity. The key data required for any conclusion of a trading
price is historical data.
Trading currencies is purely exchange of one currency for
another .The aim of this exchange is to make a profit from the change
in price of a currency pair. The traders will take a position on a
currency whose price is expected to change favourably. Once the
price of the currency has changed, the trader can then exchange the
currency with another currency whose price is favourable .The
exchange results in gains or losses.
Foreign currency risk arises when the exchange rate changes
adversely for transactions denominated in a foreign curreny . This risk
requires an enhaced level of management by an investor. The change
in foreign exchange can be frequent and unpredictable.

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INVESTMENT STRATEGIES
The example for the above concept is as below.
If we want to trade currencies by buying US
dollars and selling equivalane Japanese
Yen.From technical analysis strategy ,I will
evalaute the price changes over the last 12
months to determine the trend and volatility.
Looking at this curreny pair basic trends of
highs ,lows and averages. When I review the
current price of the currency pair which is
111.88 ,I can conclude that I can buy the US
dollars at below this price and sell marginally
above this price.
Price trends as retrived from (Investing.com, 2019).
When trying to manage foreign currency exchange risk, I would
hedge a price in future. Hedging will mean that I will be certain on
what I will exchange the dollars for in future.
b.Priciples and application of a “carry trade”.
I,Principles of a carry trade.