Deakin University MAF202
Word Count: 1500 words
Question 1
a) Discuss the process through which the Australian Federal Government issues debt securities to the market. In your answer, discuss the bidding process and what determines the yield at which treasury securities are issued.
b) The Burning Cash company raised $1m through a 10-year bond issue on the 31st of December 2019. The bond pays 5% pa in coupons, with coupons paid quarterly. Calculate the price of the bond on the 8th of June 2021, given a market yield of 4.5%. In your answer, identify whether the bond is trading at a discount or a premium, and explain the logic why this is the case. Show all calculations.
[3+7] = 10 marks
Question 2
a) Deakin Hedge Fund has a substantial position in Tenca shares. The share price has been volatile over the past 6 months, and a group of equity analysts working in the fund believe that the price may drop substantially over the next 4 months before recovering. Suggest two risk minimization strategies that Deakin Hedge Fund can be adopted. In your answer explain the derivative product that would be used, the position taken, and the cash flows at maturity.
b) A company requires funding for a new factory. The company only has access to a debt facility that offers floating rate loans. However, given that the company is concerned about interest rates potentially rising in the future, it prefers a fixed rate loan. Provide advice to the company on its options.
[4+2] = 6 marks
Question 3
Explain the rationale behind capital adequacy requirements underpinning the Basel III accord. What is their purpose, and how do they restrict the operations of banks. In your answer use a hypothetical example to show how capital adequacy standards work in an Australian setting.
4 marks
