FIN358 ECA (End-of-Course Assessment) SUSS : July Semester 2024 – Fixed Income and Derivative Securities, Singapore

Section A

Question 1

You are a financial analyst at a wealth management firm. One of your clients, a conservative investor nearing retirement, seeks your advice on choosing suitable corporate bonds for her portfolio. She prioritizes capital preservation and steady income, while avoiding excessive risk. Review the table below that shows the prices, coupon rates, and yields to maturity (YTM) of various corporate bonds, each with a par value of SGD 100.

Question 1a

Identify two (2) bonds that you would recommend for your client’s portfolio. Make sure the bonds align with her objectives of capital preservation and steady income.

Question 1b

Identify any inconsistencies or unusual pricing that may indicate incorrect information or higher risk, and explain your reasoning.

Question 2

You are a fixed-income analyst at a major investment bank. Your team is evaluating Bond XYZ for potential inclusion in a client’s portfolio. The bond has the following characteristics:

• Current market price: SGD 1,234
• Par value: SGD 1,000
• Maturity: 18 years
• Coupon rate: 8%, payable semiannually
• Call provision: Callable at par (SGD 1,000) at the end of the 13th year
• Put provision: Putable at par (SGD 1,000) at the end of the 5th year

Your task is to analyze this bond and prepare a report for your client. Address the following points:

Question 2a

Explain the concept of yield to maturity (YTM) and its importance in bond valuation. Then, calculate the YTM for Bond XYZ. (Note: Round up to 4 decimal places)

Question 2b

Discuss the implications of the call provision for both the issuer and the investor. Appraise how this feature affects the bond’s risk profile. Then, calculate the yield to call. (Note: Round up to 4 decimal places)

Question 2c

Analyze how the put provision affects the investor’s decision. Then, determine the yield to put. (Note: Round up to 4 decimal places)

 Question 2d

Suppose the interest rate would increase significantly in the long run. Appraise the impact of the call and put provisions on the price of Bond XYZ under this scenario. Specifically, explain how each provision (call and put) could affect the bond’s price if interest rates rise, and what recommendations you would make to your client regarding this bond.

Question 3

You are a financial advisor at a boutique investment firm. A client approaches you with the following scenario. Your client, a risk-averse investor, has recently inherited SGD 1,000,000 and wants to invest it in her child’s education. The child will start university in 3 years, and the client estimates they’ll need SGD 1,100,000 at that time. The client is considering investment in default-free bonds. Given the following information about available default-free bonds in the market:

Question 3a

Calculate the amount of money the client needs to invest today in Bond YL to ensure she has SGD 1,100,000 in 3 years for the child’s education. (Note: Round up to 4 decimal places)

Question 3b

Now suppose the price of the Bond YL is SGD 966.1314. Assume there is no transaction cost or other fees. Help your client investigate whether there is an arbitrage opportunity. If not, briefly explain. If yes, calculate the potential profit that can be made using bonds X, Y, Z, and YL.

Section B

Question 4

Assess and identify at least five (5) risks associated with investing in corporate bonds. Give each risk you identified an example.

Prepare a video recording of the presentation of at least 3 minutes but not exceeding 6 minutes. There are two methods for ECA video assignment submission; either Record Media or Upload Media. For Upload Media, the video must be uploaded as .mp4 file format

Section C

Question 5

Prepare a set of PowerPoint presentation slides upon which the video presentation is based. Please note that the PowerPoint must be converted to PDF before submission to Canvas.