Comprehensive Bond Portfolio: Investment Rationale & Risk Analysis

This report provides a comprehensive analysis of a bond portfolio with an initial investment of $100,000,000. It begins by outlining the investment rationale behind selecting various bonds, including corporate and government bonds, based on debt-to-equity and gearing ratios. The report assesses credit risks, discusses the role of government bonds in a portfolio, and evaluates different issuers like Telstra, Emirates NBD Bank, and others. Part II focuses on portfolio assessment, explaining equal-weighted portfolios and their benefits. Finally, Part III summarizes the portfolio's composition, goals (defensive vs. risky), and the impact of duration and spread duration changes. It also addresses credit risks facing corporate issuers and provides a final recommendation on the portfolio's optimal choice, considering diversification and risk management. This assignment highlights the importance of balancing risk and performance in bond investments.

PART I – INVESTMENT RATIONALE
Answer 1

Answer 2
Answer 3
According to the Debt to Equity ratio and the Gearing ratio in my portfolio it shows
that the safest bond is Insurance Australia Group Ltdwith 0.294 debt/equity which
means it is more financially stable business, and the gearing ratio is 0.23. The
riskers bond in the portfolio with highest Debt to Equity ratio is the NATIONAL
AUSTRALIA BANK LTD with 4.33 and gearing ratio of 0.81.
Credit analysis is important for investors to measure the company’s ability to pay
back its debt obligation. Moreover, it is the way to determine the level of risk for the
entity.
Answer 4
In the stable and strong economies Government bonds considered to be risk free
bonds. since its baked by government by raising taxes or print money to repay their
domestic currency debt. However, in reality we can’t say its risk free since
government bond may default if the value currency reduced or the economy is not.
Examples of the government default are Portugal, Italy, Ireland, Greece and Spain

Answer 5
Issue explain what each
of the issuer’s does
Strength Weaknesses
Telstra telecommunications
company which
builds and operates
telecommunications
networks and
markets voice,
mobile, internet
access, pay
television and other
products and
services.
1. Telstra is
Australian leading
telecommunications
and information
services
company and
Expanding
Operating Margin
2. Wide Range of
Service Portfolio
3. Strong Customer
Service Base
4. Active
sponsorship in
major sporting
events
5. Over 35,000
employees serving
customers from
230 countries and
territories indirectly
1. Limited
Liquidity
Position
2. Extremely
tough market
segment means
limited market
share
Beta is
0.69
Less
sensitive
8%
Emirates NBD
BANK PJSC
One of the largest
banking groups in
the Middle East in
terms of assets
which provides
corporate,
consumer, treasury,
and Islamic banking
services.
1. Dominant market
position
2. Strategic
differentiation by
being the leaders in
network
3. Investments in
latest technology
4. Expansion in key
markets
5. Cordial relations
with regulatory
bodies
1. Operational
inefficiencies
and
unsatisfactory
customer
service.
2. Suffers from
latency issues
when
compared to
competitors
Vodafone and
Optus.
3.Price higher
than
competitors
Beta:
0.58
Less
sensitive
8%
COMMONWEALTH
BANK OF
AUSTRALIA
Australian
multinational bank
with businesses
across New
Zealand, Asia, the
. The bank owns
various brands.
2. The bank has
operations in
The bank was
involved in
controversies
which was
started by a
Beta:
1.10
More
sensitive
10%

United States and
the United Kingdom various countries.
3. The bank
provides services
such as Insurance,
Consumer banking,
Corporate banking,
Investment banking,
Global wealth
management,
Private equity,
Mortgages, Credit
cards.
4. The bank has a
strong revenue and
increasing profit
action group
and website
called
“Unhappy
Banking”
2. The financial
strength rating
by Moody’s
provided for
the
Commonwealth
bank is B-
3. The bank
sees a loan
impairment
expense which
a is concern.
NATIONAL
AUSTRALIA BANK
LTD
.Strong brand name
and good financial
position
2.Good revenue and
interest income
3.Leading financial
player with diverse
products and
services
4.Personal and
business financial
services
5. Australia's largest
business bank by
assets
.Decline in
revenue
affecting
growth and
development
2. No global
acclaim
10%
QANTAS AIRWAYS
LTD
largest airline by
fleet size,
international flights
and international
destinations. It is
the third oldest
airline in the world
1. Strong
international and
domestic presence
2. Backing by the
government of
Australia.
3. Has been one of
the oldest airline
operators in the
world
4. Qantas
1. Issues like
price fixing,
incidents etc
have hurt the
image in the
past
2. Limited
international
presence
of Qantas
Airways
compared to
Beta:0.12
Less
sensitive
5%

Airways has nearly
80 internationals as
well as domestic
destinations
other leading
global airline
companies
Bendigo and
Adelaide Bank
financial institution
primarily providing
retail banking
service
1. Strong presence
in Australia with a
vast number of
branches and
ATM’s.
2. Strong
representation of
females in senior
management
(including senior
managers and
executives)
3. Proper
demarcation of
tasks in various
committees.
4. It has over 900
outlets across
Australia
1. Equity has
been increasing
which would
lead to dilution
of the
ownership in
the bank
2. As the bank
is following
stringent credit
measures, it
rejected a few
claims for the
loans which
may be likely to
default thereby
decreasing the
operating
income for the
bank
3. It has
increased the
reserve for
credit losses
and it reduces
the money
available with
the bank
Beta:1.11
More
sensitive
5%
ANZ Banking
Group
the third largest
bank by market
capitalisation in
Australia. Its
services range from
retail banking to
insititutional
banking services
1.One of the Largest
banks in New
Zealand
2. Diversified
product portfolio
reduces the
business and
operating risks of
ANZ
3. Has a
considerable
1. Global
exposure is
limited as
compared to a
few other
major banks
2. Strong
competition
from existing
players makes
beta
1.28.
More
sensitive
8%

market share in
Australia, New
Zealand and Pacific
countries
4. Strong financial
position providing
resilience to
adverse market
developments
5. Offers financial
services, including
banking services,
asset finance,
investments and
payment solutions
it difficult to
increase
market share
Insurance
Australia
Group Ltd
multinational
insurance company
formed by the
demutualisation of
NRMA
1. Strong player
in the non-life
insurance
segment in
Australia
2. Widespread
geographical
diversification
with an
extensive
market reach
3. Strong
resilience to
adverse market
situations with a
robust capital
adequacy
4. Globally
present in over
45 countries
5. Number of
employees is
approx greater
than 15,000
worldwide
6. Acquisition of
prominent
companies has
strengthened its
value and
expertise
1. High
reliance on
third party
leading to
higher costs
of
reinsurance
2. Declining
underwriting
profitability
owing to
drastic fall in
the
operating
ratios
beta :1.0
8
More
sensitive
5%

WESTPAC
BANKING CORP
one of Australia's
"big four" banks
1. Leads in
terms of number
of branches and
ATMs in Australia
2. Second
largest business
banking lender
in Australia
3. Leads in
Institutional
banking in
Australia
4. Provides
flexible banking
services like
migrant banking
5. Over 40,000
employees serve
more than 12
million
customers
1. High
competition
in retail
banking from
other leading
banks
2.Number of
branches are
still less
when
compared to
some majot
banks
Beta:1.46
More
sensitive
5%
BNP PARIBAS
SA
French international
banking group. It is
the world's 8th
largest bank by total
assets, and
currently operates
with a presence in
77 countries
1.Strong brand
name and good
financial position
2.One of the
biggest banking
group across the
world
3.Wide
geographic
presence
4.High brand
visibility
1.Intense
competition
in the
banking
sector
Beta:
1.27
More
sensitive
6%

PART II – PORTFOLIO ASSESSMENT
Answer 1
Answer 2
The equal-weighted portfoliomeans the weight of the portfolio divided equally
between the assets for example in my portfolio I divided the total 100% of the
portfolio by 15 bonds which gave me 6.66% for each bond. The portfolio has the
benefit of easier rebalancing – given liquidity. Moreover, is a good measure of the
historic returns of the portfolio, had the portfolio manager avoided any over or
under weightings to a particular asset.

Answer 3
Answer 4

Answer 5

PART III – PORTFOLIO PRESENTATION
In this section you will put together a summary of your portfolio – this includes the findings and rationale
behind your investment decisions. There is a total of 1500 words allowed – no academic references are
needed.
Question 1 (4 marks) – 300 words Explain briefly the composition of your portfolio – discuss why you
have invested $100,000,000 into the bonds you have chosen. What is the overall goal of this portfolio in
your perspective? Is it defensive or risky?
Question 2 (4 marks) – 300 words With respect to Part II – Question 5 – explain what the risk metrics you
have found mean – what will happen to your portfolio as the duration and spread duration change for
the fixed rate bonds and the floating rate notes?
Question 3 (4 marks) – 400 words What are some of the credit risks facing the corporate issuers you have
chosen – in reference to each individual business what do you foresee as the biggest risk in the next 5
years?
Question 4 (3 marks) – 200 words Provide your final recommendation on the portfolio – make clear why
you believe it is the optimal choice for investing the $100,000,000.
Answer 1
Generally, Portfolio depends on the individual’s risk appetite. It is logically
that the more risk resulting in more return. The main goal of my portfolio is to
balance the risk against performance. Focusing on long-term growth while
maintaining an overall high to average rate, this portfolio composite of 15 different
bonds diversify between fixed rate, floating rate, and government bonds. My
portfolio has got a diversified approach to investing in bonds. Among the fifteen
some of them are invested in the floating rates and others in a risk-free investment
of the government bonds.

Fixed coupons offer a predetermined cash flow, which is welcomed with the
aiming at a reliable income. Additionally, fixed coupon bond is usually provided with
a smaller spread comparing to floaters.
Floating rate generally is insensitive to interest rate change. They yield higher
interest when the market is booming and lower when in recession.
Government bonds are favourable since it is safer with a risk-free rate as
compared to other types of the bond which have fluctuating rates and hence risky.
Through the consideration of the balance of risk and performance i chose to
invest my 100,000,000 dollars in seven different bonds, through this I consider my
investment as more defensive rather than risky. Risk spreading is one of the tricks in
the trading of bonds, and hence through choosing seven bonds, I am quite sure that
my perspective of avoiding risks is been achieved. Looking at face value and the yield
rate of all the seven bonds it is clear that through diversification all the yield rates
are over two percent which means that the profit maximization will be easily
achieved. More so the swap speed of all the issuers re above seventy-five, hence
keeping my bonds more secure and profitable.
The benefit of diversifying the portfolio is to reduce the overall risk and also
improve the returns on every bond of the portfolio by reducing the variances. It is
significant to consider the Geographic distribution since a loss that might occur in
one market can be offset by the gains in another market. Through this, the level of
vitality and exposure will be significantly reduced to external factors. From my
portfolio, I chose to invest seventy percent in a fixed and also floating rate. In my
remaining thirty percent of the collection, I spent in the government bonds. I can
refer to this as a defensive investment.

Answer 2
Interest rate risk is one of the significant dangers that bonds may face which is the
probability of a failure in the value of an asset resulting from an unexpected change in interest
rates. This risk is mean in my invested bonds as from the fixed bonds the highest time is seven
and more the time the more the convexity and hence the probability of interest rate risk to occur
are mean. Inflation risk also called purchasing power risk, is the chance that the cash flows from
an investment won't be worth as much in the future because of changes in purchasing power due
to inflation which is related to the duration.
Also, there is an inverse relationship between the interest rate and price. Market risk can
also be referred to as systematic risk; it represents the probability in which an investor makes a
loss as a result of a general effect on the overall financial markets performance which is hard to
be reduced by diversification. From the floating bonds notes, the market risk was found to be
mean as the minimum spread time is zero for one issuer and the rest are above four making it
mean for the invested bonds to be affected by the market risk.
Liquidity Risk: if the market is not liquid, it will not be easy to sell or buy the bonds.
Hence there is a need to consider the liquidity of the risk in the market one is going to trade in. In
the invested bonds market the duration for the floating rate notes is all below a year hence making
the market more liquid to trade in. Credit risk is the risk when the company is not can pay back its
debt. Credit risks are resulted due to the fraudulent means of financial reporting in the
organization. From the invested bond portfolio credit risk is mean as from the fixed bond rates it
is clear that every issuer has a convexity of more than four and also the BPV is raging below one.

A fluctuation in the market rates also keeps companies at the risk of not being able to settle their
borrowed debts. Through the consideration of this risk, I decided to invest thirty percent of my
portfolio to a risk-free investment where the government bonds will help me sort out my debts.
Answer 3
Generally, there are three types of credit risks which are; Credit spread risk occurring due
to volatility in the difference between investments’ interest rates and the risk-free return rate.
Telstra is a telecommunication company that i have chosen to invest in, but there are several
credit risks that the company might face shortly which will affect my investments. The company
is currently in a state where it has Limited Liquidity Position, and also the company exists in an
extremely tough market segment. This means that the company is in the risk of having a limited
market share as compared to the competitors.
Default risk is a type of trade risk which arises when the borrower is not in a position to
make contractual payments. Qantas Airways Ltd which has a credit rating of BB might also be
placing the investment in default risk in the next five years. This is because from the historical
background of the company it is evident that, Issues like price fixing, incidents and many more
have hurt the image in the past finally, and the company has a limited international presence of
Qantas Airways. The invested portfolio may suffer loss as the company has a history of reduced
pricing and price fixing which are unlawful.
Downgrade risk resulting from the downgrades in the risk rating. The table in question 1
part 2 shows the details related to the portfolio. Considering different weights in each bond,
Portfolio coupon each year will be 3.45%., portfolio time-to-maturity will be 6.93 years from
today and the total capital return earned if the portfolio is held till maturity will be 2.82%
approximately. The portfolio credit spread shows the risk of the portfolio about the benchmark

government bond. About factors shown above, the change in each element can have a significant
impact on the overall value of the portfolio.
Answer 4
The analysis conducted concludes that the portfolio will perform excellently. The
portfolio can be altered based on the risk appetite of an individual. The statistical
analysis finds that the risk and return level of portfolio, but we don’t guarantee the
return based on statistical analysis. The portfolio return is subjected to the various
risk involved. The portfolio to be invested shows that the market may be too risky
but as discussed earlier the more the risk, the higher the returns are expected. For
instance, Credit Risk, Market Risk, and Interest rate Risk. About the risk level of the
portfolio following points will conclude that portfolio can be rated medium risk. With
a medium risk investing the portfolio will be expected to result in the best of the
current market.
Although future predictions of the partners show higher rates of risk, if the
medium risk does not affect the company the co-operation can be considered.
Furthermore, 11/15 are rated AA and above A only four bonds rating BBB which
shows that the probability of the risk occurring is mean. Besides, Interest coverage is
high in almost all issuers in the portfolio. The Portfolio is well diversified with a
different rate, geographically and sector which reduced the overall risk. And finally,
the whole portfolio credit spread; this means that the interest rates are above the
government issued and the benchmark bond is less than 2%. Hence it is worth
investing in the portfolio.