In-Depth Bond Analysis: Yield Curve, Duration, Holding Period Return

This report provides a comprehensive bond analysis, divided into three parts. Part A focuses on constructing a yield curve using zero-coupon bond yields and determining bond prices using the Discounted Cash Flow (DCF) method, further exploring arbitrage opportunities with treasury bonds. Part B calculates the present value and modified duration of selected bonds, interpreting the impact of Yield to Maturity (YTM) changes on market value. Part C examines the relationship between yield curves, holding period returns, and reinvestment rates, including sensitivity analysis on YTM variations. The analysis uses Yield to Maturity (YTM) for discounting bonds and associated coupons, with detailed calculations and results annexed as a solution.

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Bond- Analysis (Part A, B & C)
I. PART A- Yield Curve
In part A of the analysis, yield curve has been drawn on the basis of Zero Coupon bond
maturity yield starting from 0.5 month to 10 years. The result of plotting such yield
curve is:
The resulting yield curve for these bonds is considered normal because it is concave
down (increasing), and the rates are increasing as the times to maturity are further
out.
Post plotting of curve, the yield was used to determine the present value of bond using
Discounting Cash Flow Method (DCF) whereby the prices of bond has been
determined accordingly. The determined prices have been detailed here-in-below:
Sl
No Code Value (Anually) Value ( Semi-Anually)
1 GSBS18 100.69 100.69
2 GSBE19 103.32 103.33
3 GSBS19 101.18 101.18
4 GSBG20 104.84 104.87
5 GSBU20 99.16 99.15
6 GSBI21 110.34 110.39
7 GSBM22 111.53 111.59
8 GSBG23 111.73 111.80
9 GSBG24 100.99 100.99
10 GSBG25 102.94 102.96
11 GSBG26 107.90 107.95
12 GSBG27 110.98 111.05
13 GSBU27 99.88 99.88
14 GSBI28 96.67 96.65
15 GSBG29 103.01 103.03
16 GSBG33 110.87 110.94
17 GSBK35 97.78 97.77
18 GSBG37 105.12 105.15
19 GSBK39 100.77 100.77
20 GSBE47 97.65 97.63
Further, the value has been determined using Goal seek in excel enclosed.
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The arbitrage opportunity has been explored by using zero coupon bond and 4 treasury
bond and the arbitrage profit has been explored at AUD 15.23.
II. PART B- Duration
The Present Value and modified duration has been computed at 87.87 and 5 Years.
Further, under two bonds that were selected are GSBG24 and GSBG25. The detailed
calculation of the same has been computed in excel and annexed as solution.
Further, the calculation of modified duration of Bond A has been 4.134. Similarly, for
bond B it is 4.58. The interpretation of the same is as follows:
For every 1 % change in YTM, the market value of Bond A changes by 4.134 and for
Bond B by 4.58.
Further, the answer to last question is Bond A price is 105.16 and Bond B price is
107.65.
III. PART C- Holding Period Return
In part C of the question, various curves have been drawn to understand the
relationship between, the yield curve, holding period return, reinvestment rate etc.
Further, in case of selling Treasury bond maturing 5 years and purchasing treasury
bond maturing 10 years, there is a net inflow of resources at present hence Holding
Period Return on the same cannot be computed as the same shall give vague results.
Further, in all the 3 above analysis the yield on zero coupon bond has been taken as
Yield to Maturity for the purpose of discounting the bonds to their present value as
well as the coupons associated with those bonds. The result have been computed for
sensitivity analysis whereby the YTM has increased or decreased by 25 bps, 50 bps, 75
bps and 100bps. The detail working of the same is annexed herewith and marked as
Solution.
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