SUSS FIN357 Fixed Income Securities: Analysis Assignment Solution

This document presents a detailed solution to a FIN357 Fixed Income Securities assignment, addressing key concepts in fixed income analysis. The assignment covers various aspects of bond valuation, including the analysis of floating rate notes, fixed rate notes, and mortgage-backed securities. The solution explores the price behavior of different bond types, factors influencing prepayment conditions, and the risks associated with investing in specific bonds. It also provides calculations for spot rates, forward rates, and bond durations. Furthermore, the assignment delves into the valuation of callable bonds and the impact of rising interest rate volatility on bond prices. The solution provides a comprehensive analysis of the topics covered in the assignment, offering insights into the complexities of fixed income securities.

Running head: FINANCE FIXED INCOME ANALYSIS
Finance Fixed Income Analysis
Name of the Student:
Name of the University:
Authors Note:

FINANCE FIXED INCOME ANALYSIS
1
Table of Contents
Question 1:.................................................................................................................................2
Answer a:...................................................................................................................................2
Answer b:...................................................................................................................................2
Answer c:...................................................................................................................................2
Answer d:...................................................................................................................................2
Question 2:.................................................................................................................................3
Answer a:...................................................................................................................................3
Answer b:...................................................................................................................................3
Answer c:...................................................................................................................................3
Question 3:.................................................................................................................................4
Answer a:...................................................................................................................................4
Answer b:...................................................................................................................................4
Answer c:...................................................................................................................................4
Question 4:.................................................................................................................................4
Answer a:...................................................................................................................................4
Answer b:...................................................................................................................................5
Answer ci:..................................................................................................................................5
Answer cii:.................................................................................................................................6
Answer ciii:................................................................................................................................6
Question 5:.................................................................................................................................6
Answer a:...................................................................................................................................6
Answer b:...................................................................................................................................7
Answer c:...................................................................................................................................7
Reference and Bibliography:......................................................................................................8

FINANCE FIXED INCOME ANALYSIS
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Question 1:
Answer a:
The price range of floating notes are narrower than the price range of fixed rate note,
as the floating note pay a coupon that adjusts to market levels. This relevantly indicates that
the dramatic price change will is not conducted by floating notes, as market yield fluctuates,
which is not possible for fixed rate note.
Answer b:
Price of floating rate may not sell at par, as the yield spread between one-treasury bill
can be wider than when the bond was issued. In addition, the credit rating of the organisation
might have eroded in comparison to treasury securities, which does not allow the price of
floating rate to sell at par value (Bruno & Shin, 2017).
Answer c:
The investors indulged in floating rate note would not care much about the call price,
as the risk of call is low. In addition, the bond will not sell above the par value due to the
presence of adjustable coupon rate, which relevantly indicates the possibility that bond will
ever be called.
Answer d:
Currently the fixed rate note sells at 90% value of call price, which indicates the low
risk of call, as the yield is relevantly higher. Thus, the yield needs to substantially decline in
value for the firm to call the bond.

FINANCE FIXED INCOME ANALYSIS
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Question 2:
Answer a:
The coupon rate of mortgage does not have any impact on the prepayment conditions
of the bond.
The changes in age of mortgage will drastically impact the prepayment conditions,
where the increment in age would reduce the prepayment value and reduction in age would
increase prepayment values.
Seasonality also influences the overall prepayment condition of the bond, as it
relevantly influences the age of the bond, which affect prepayments (Chandra, 2017).
Answer b:
Issue Coupon WAM(M) Price CM CPR Principal payment
MBS-
1
7.50% 355 100 5 $0.09
MBS-
2
7.50% 260 100 12 $0.18
From the overall evaluation of the above table MBS-2 is considered to have the
highest principal payment. The calculation has relevantly helped in understanding the level of
principle payment that needs to be paid by the both issues.
Answer c:
The value of other mortgage backed securities relevantly does not decline as quickly
as the automobiles, where the automobiles deprecates at higher level than other securities.

FINANCE FIXED INCOME ANALYSIS
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The interest rates have relevantly increased over time, where the amortization of asset would
increase the stabilisation of prepayments.
Question 3:
Answer a:
The 10-year Superchicken US$ bond paying a coupon of LIBOR+8% is considered a
mortgage backed bonds, as the organisation has presented 20 farms as collateral for the bond.
Answer b:
There is significant risk that Singapore investors can face while investing in the bond,
which are inflation risk, market risk and credit risk. The high-risk attributes of the bond
would negatively affect return generation capability of the investors in Singapore.
Answer c:
The overall quality of the collateral assets is relevantly adequate, as agricultural land
is being provided, which can yield high value in near future. Therefore, the market valuation
of the agricultural lands needs to be conducted for identifying the actual quality of the assets
used as the collateral for the bonds (Li, 2015).
Question 4:
Answer a:
Years to
maturity
Par Coupon yield
maturity
Calculated spot
rate
Calculated 1-year
forward rate
1 5.00% 5.00% 5.00%

FINANCE FIXED INCOME ANALYSIS
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2 5.20% 5.21% 5.42%
3 6.00% 6.05% 7.75%
4 7.00% 7.16% 10.56%
5 7.00% 7.12% 6.97%
Answer b:
The valuation of the financial assets like coupon paying bond relevantly needs
different discounting rate, as it helps in understanding the relevant level of future cash flows
of the bond.
Answer ci:
Particulars ABC Value
FV 101.75
Coupon rate 3.13%
Time 14
Yield 3.01%
Coupon 3.179688
0.04
4.79
Macaulay Duration 4.83
Modified Duration 4.69
Effective duration 7.35
Particulars XYZ Value
FV 101.75
Coupon rate 3.68%
Time 14
Yield 3.55%
Coupon 3.73931
0.05
4.74
Macaulay Duration 4.79
Modified Duration 4.62

FINANCE FIXED INCOME ANALYSIS
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Effective duration 5.40
Answer cii:
Particulars ABC Value
FV 101.75
Coupon rate 3.13%
Time 1
Yield 2.76%
Coupon 3.18
Price 102.11
Particulars XYZ Value
FV 101.75
Coupon rate 3.68%
Time 1
Yield 3.30%
Coupon 3.74
Price 102.12
Answer ciii:
The actual price change would be greater for ABC, as the overall yield to maturity of
the bond is low in comparison to XYZ. Therefore, it is indicated that bonds prices relevantly
increase more when yield is lower and vice-versa.
Question 5:
Answer a:
100
10
$100.36
9.6030
%
10
$102.4
8 100

FINANCE FIXED INCOME ANALYSIS
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8.48% 10
10
$105.9
7 $101.98
7.50% 7.86%
10
$105.3
5
6.94% 100
10 10
$103.35
6.44%
10
100
10
The value of bond at Year 0 is at the levels of $105.97
Answer b:
$102.0
0
8.48%
10
$104.1
9
7.50%
$102.0
0
6.94%
10
Value of callable bond is at the levels of $104.19.
Answer c:
The rising interest rate volatilities will relevantly decline the overall bond price,
which will not initiate the callable bond.

FINANCE FIXED INCOME ANALYSIS
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FINANCE FIXED INCOME ANALYSIS
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Reference and Bibliography:
Bruno, V., & Shin, H. S. (2017). Global dollar credit and carry trades: a firm-level
analysis. The Review of Financial Studies, 30(3), 703-749.
Chandra, P. (2017). Investment analysis and portfolio management. McGraw-Hill Education.
DeFusco, R. A., McLeavey, D. W., Pinto, J. E., Anson, M. J., & Runkle, D. E.
(2015). Quantitative investment analysis. John Wiley & Sons.
Hanson, S. G., Shleifer, A., Stein, J. C., & Vishny, R. W. (2015). Banks as patient fixed-
income investors. Journal of Financial Economics, 117(3), 449-469.
Jordan, B. (2014). Fundamentals of investments. McGraw-Hill Higher Education.
Li, X. (2015). Accounting conservatism and the cost of capital: An international
analysis. Journal of Business Finance & Accounting, 42(5-6), 555-582.
Petitt, B. S., Pinto, J. E., & Pirie, W. L. (2015). Fixed income analysis. John Wiley & Sons.
Philippon, T. (2015). Has the US finance industry become less efficient? On the theory and
measurement of financial intermediation. American Economic Review, 105(4), 1408-
38.