FIN 4504 University of South Florida Principles of Investments Project Based on the information given in the table, complete the computations and answer th

FIN 4504 University of South Florida Principles of Investments Project Based on the information given in the table, complete the computations and answer the questions that follow. Principles of Investments
FIN 4504
Project #3
Following is information about bonds that are identical except for their terms to maturity:
Bond
AZY
TSR
LKJ
ONM
WAV
JQU
Coupon
4.60%
9.40
6.20
?
3.50
7.40
Maturity
12/31/25
12/31/26
12/31/27
12/30/28
12/31/29
12/31/30
Price
103.0650
124.6480
?
96.0080
85.5360
?
Yield
4.02%
?
5.39
5.57
?
5.21
Assume that today is December 31, 2019. Each bond pays interest semiannually, on June 30 and
December 31 every year.
Based on the information given in the table, complete the computations and answer the questions that
follow.
1. Using spreadsheet functions, compute the missing values in the above table (i.e. fill in the
appropriate values where there are question marks).
2. Once you have filled in the missing values, use the spreadsheet graphing function to draw the yield
curve represented by the information provided in the table.
• Discuss and interpret the term structure of these rates.
• Does the slope of the yield curve suggest the direction interest rates will move during the
sixyear period from 2025 to 2030? Explain your answer.
3. Assuming the expectations hypothesis is the only explanation for the shape of the yield curve,
forecast the one-year rates for the years 2026 – 2030 (i.e., the rate from January 1 through
December 31 of each year). That is, compute the forecasted one–year (annual) interest rate for
2026, for 2027, for 2028, and so forth. You should compute the one-year rates considering the
effects of compounding. (HINT: See the example on page 313 in the textbook and Example 10.16
on page 313). Discuss the results of your forecast.
4. Compute Macaulay’s duration for each bond using each of the following methods.
• Set up a table for each bond similar to Table 11.1 on page 331 in the textbook and in the
Chapter 11 PowerPoint slides, and calculate the bond’s duration by computing the weights of
the present values of the cash flows the bond will generate for the remainder of its life.
• Use the equation given in the online lectures (included on slide #10 of the Chapter 11
PowerPoint slides; link: http://sbesley.myweb.usf.edu/FIN4504/ppt/Chapter11-11e.pptx).
• Use the DURATION function available in Excel (See the example given in Table 11.2 on page
333 in the textbook.).
Discuss the meaning of duration and how investors can use the concept of duration to manage risk
when purchasing fixed-income securities, such as bonds.
5. Construct an immunized portfolio for an investor with an investment horizon equal to seven (7)
years.
• You must include at least three of the bonds in the portfolio.
• Compute the expected yield of the portfolio you construct.
• Compute the total amount an investor must invest in each bond in the portfolio if s/he faces a
liability equal to $250,000 in seven years. (See Example 11.2 on pages 339 -340 in the
textbook.)
6. Consider everything you have completed to this point. Will the portfolio you constructed in Part 5
remain immunized after one year has passed? Explain. In relation to the time left in the investor’s
investment horizon (six years), describe what you think the duration will be after one year has
passed. No computations are necessary to answer this question.
Additional requirements/information:
•
This is not a group assignment—it should be completed individually.
•
Type (double-spaced) your discussions/explanations. Your discussions/explanations should consist
of properly constructed sentences. You should use your own words in your discussions. Do not cut
and paste discussions from the book, from the Internet, or from other sources. If you use any ideas
or information that are not your own, you must provide citations. You can use any acceptable
citation method to recognize the work/ideas of others. Your project will be checked using Turnitin
on Canvas. If your Turnitin score (Similarity Score) is greater than 20 percent, the score you earn
on the project will be reduced by ½ point.
•
You must complete all computations using a spreadsheet. You must use spreadsheet functions or
set up equations in the appropriate cells to complete the required computations. Do not plug in
numbers where computations are required or where you should reference a number located in
another cell in the spreadsheet; otherwise, you will lose points. In other words, the appropriate
computations should be completed in the spreadsheet, not on your calculator. If you input values
(numbers) in the spreadsheet rather than using the appropriate functions or setting up equations to
complete the computations, you will lose one (1) point for each instance this occurs.
•
You must submit your project on Canvas. You should submit two files: (1) an Excel file that
shows the computations you completed and (2) a Word document or a PDF document that contains
the required discussions/explanations. The spreadsheet you submit must include the
equations/functions that were used to complete the required computations.
•
Projects will be graded on a 10-point scale—10 is the highest grade you can receive. Projects
submitted after 11:59 p.m. on April 28 will be penalized two (2) points for every 12 hours of
tardiness such that a late project that is submitted before noon on April 29 will be penalized two
points and a project that is submitted from noon until 11:59 p.m. on April 29 will be penalized four
points. Projects will not be accepted if they are more than one day (24 hours) late.

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