# Coursework

PART 1: Short objective questions with explanations

Q1. (20%) As an Analyst for a hedge fund trading bonds, you are preparing for the Monday morning trader’s meeting. Using the following data from Reuters, please answer the questions below in preparation for the meeting:

a. Using the data supplied, please plot the current yield curve out to fifteen years . (use excel and show me how u did it ) and make the calculations and the graph . (10 marks)

b. Due to economic uncertainty, it is expected that the Bank of England will pursue an expansionary monetary policy, how might such policy shift the yield curve? Explain why. (20 marks)

c. If because of global economic anxiety, markets became more worried of the future, how would it affect the Maturity Premium and how would the Yield Curve shift? Explain why. (20 marks)

d. A client of the fund is seeking advice on funding an investment with a five-year horizon. The client has a AAA credit rating and pays 100 basis points over the Bank of England Overnight Rate (i.e. they are paying 3% when the Bank of England rate is 2%). Assuming all other factors are equal and using the data provided, what is the client’s firm likely to pay under the funding alternatives shown in the table. Looking at the funding alternatives, what would you recommend? ( do it on excel ) (30 marks)

e. To help the client of the fund, using relevant theories, please explain the factors shaping the Yield Curve and why a pure Expectations Theory, as you have used, may not be accurate. (20 marks)

Q2. (20%) Sadly, your Uncle Norman has passed away leaving your Aunt Joan with the following investment portfolio. By answering the questions below, can you give her advice on which investments to keep, which she should sell and possibly increase her holding. For your information, the FTSE 250 Index (shares,stocks) has return of 15% and Bank of England bonds have a return of 2%.

j

a. Using relevant information and theory, which shares do you think she should sell? (25 marks)

b. Using relevant information and theory, which shares do you think she should keep or even increase in holding? (25 marks)

c. Your late Uncle held all of these shares in roughly equal amounts. Was this a good idea and if not, what would you suggest? (25 marks)

d. Given your understanding of relevant theory, what should happen to shares which are offering rates of return which are different from the market? (25 marks)

Q3. (20%) As a consultant for Deloitte, you have been asked to review the Risk Governance of Metro Bank Plc which has the following Balance Sheet

a. Inspecting the above Balance Sheet, explain the ways in which risks or exposures may arise for Metro Bank. What risks are they running? (25 marks)

b. Liquidity Gap compares the tenor of Assets with that of Liabilities. To what extent has the Allied Bank matched the maturity profile of Assets with those of its Liabilities? Does Maturity Profile provide a complete picture? (25 marks)

c. As you will notice some assets/liabilities are fixed and others are floating. To what extent has Metro Bank created exposures or risks in this regard? Under what scenarios would Metro’s Net Interest Income improve and under what scenarios might it become worse? (25 marks)

d. According to the Treasurer of Metro Bank, risk is under control because floating assets are funded with floating liabilities. Do agree or disagree? Explain why. (25 marks)

2

Bank of England Overnight Rate2%

Current Forecast of Inflation3%

ALTERNATIVE FIVE YEAR FUNDING STRATEGIES

Borrow one year fixed and re-finance for four years at end of year one

Borrow for two years fixed and re-finance for three years at the end of year two

Borrow for thre years fixed and re-finance for two years at the end of year three

Borrow for four years fixed and re-finance for one year at the end of year four

Weighted Average

Cost of Funds over

Five Years

CODENAMEBETAROE

P/E

RATIO

UKCMUK COMMERCIAL PROPERTY0.8211%36.12

FOUR4IMPRINT GRP.1.4325%10.00

888888 HLDGS0.9541.60%8.41

ASLABERFTH.SMLL.CO1.58-99%-3.12

AGKAGGREKO0.739.25%15.96

AAFAIRTEL AFRICA1.336.73%22.70

AJBAJ BELL0.386.5830.13

CRSTCrest Nicholson0.759.52%15.58

RATRathbone0.595.46%44.00

ASCLASCENTIAL0.7931.1529.79

PLPPolypipe0.5415.2221.96

Mortgage Loans (Avg Tenor 20 Years, Fixed at 6%)20.04€ Deposits (2 % Floating Rate)37.10€

General Lending (Avg Tenor 3 Years, Fixed 5%)30.07€ Wholesale Debt (Avg Tenor 2 Years at 4%)19.30€

Investment Portfolio (Bonds and Shares, Avg Yield 9%)16.79€ Issued Bonds (Avg Tenor 5 Years, Duration of 3, 6% Yield)5.00€

Money Market Assets -(Floating preently 4%)1.20€ Other Liabilities (< three months, floating rates)8.00€

Earning Assets (Yield 12% Fixed 5 Years)68.10€ Subordinated Debt (5% fixed)3.35€

Other Assets (Fixed: Bldgs)8.00€ Equity Shares (Beta = 1.2, Investors Expect 14%)3.35€

Total Assets76.10€ Total Liabilities76.10€

ASSETS (Euro Billions)LIABILITIES (Euros billions)