Learning Outcomes Assessed To develop knowledge and understanding of the main as

Learning Outcomes Assessed
To develop knowledge and understanding of the main aspects of fixed income securities and their analysis from a theoretical and practical perspective
To develop an understanding of types of risk that are associated with investments in fixed income securities and to be able to critically assess the factors that influence that risk
To acquire practical quantitative analysis skills, using relevant Excel spreadsheets in the area of valuation of fixed income securities and measuring risk associated with selected securities
To develop the ability to interpret observed interest rates in the context of theories of interest rates and to be able to critically evaluate the implication of relevant theories from a practical perspective
To develop an understanding and appreciation of how theory and evidence can be combined using selected problems related to bond portfolio management
To develop intellectual skills that enable rigorous and logical problem solving abilities through consideration of problems related to fixed income analysis
To be able to conduct a critical discussion about practical and theoretical aspects of fixed income analysis
Grading Criteria
Your work will be assessed based on the following criteria:
Your ability to source and use a variety of types of material
Your ability to analyse key information in a concise and clear manner
Your ability to identify and collect the relevant data necessary for the quantitative analysis
You ability to present the quantitative analysis related to part (1) of this assessment in a clear and approachable manner with all the crucial explanatory elements included in the report
Your ability to critically evaluate a given statement and develop a response which demonstrates knowledge established during the course and within an individual context
Your ability to compare and contrast and reach objective and impartial conclusions
Your ability to search for adequate academic and professional literature, provide a concise and topic-related summary of its content and properly use it in your argumentation
Your ability to reference academic and professional literature in an appropriate manner
Market Efficiency and the Role of Manager in Bond Portfolio Management.
In this part of the assessment we would like you to think broadly about active bond portfolio management and the role played by portfolio managers in this process.
As a starting point, we would like you to read the following:
‘Yield Curve Strategies’ by Frank J. Jones, Journal of Fixed Income (1991), issue 1(2), pp: 43-48.
‘Positioning Bond Portfolios for Rising Interest Rates’ by William Martin, Stephen MacDonald and Peter Moore, December 2017.
‘Rising Interest Rates and the Impact on Bond Portfolios’ by Larry Swedroe, January 2018
In addition, you are expected to search for other relevant readings and resources that could be useful to you in this part of the assessment.
Frank J. Jones states in his article:
“Empirical evidence suggests that approximately 95% of the total return on a Treasury portfolio is attributable to three types of changes in the yield curve. Actual yield curve changes usually occur in combinations of these three types, not singly: a parallel shift, either up or down, as shown in Figure 1A (for an upward parallel shift); a twist, rotation or change in the slope of the yield curve as shown in Figure 1B (less steepness); a butterfly, or change in the “humpedness” of the yield curve with either less of a hump (a positive butterfly), as shown in Figure 1C, or more of a hump (a negative butterfly). Of the total return of the Treasury portfolio explained by these three types of changes, 86.5% of the return has been attributable to parallel shifts in the yield curve, 9.8% to twists, and 3.6% to butterfly changes.”
According to Jones (1991), the most common changes are a combination of a downward shift and steepening, or an upward shift and flattening. In the same article it is also suggested, from observation of the US Treasury market, that returns generated from bondholdings are predominantly due to parallel shifts and steepening or flattening of the curve, while only a small proportion of the total return results from changes in the humped nature of the curve. The conclusion is that a fund manager adopting a yield curve strategy would have to accurately forecast the direction of the parallel curve shift, as well as the change in the curve spread. This places the approach, in analytical terms, in the same class as interest rate forecasting.
The above summary is, however, just a starting point in the discussion of a broader topic of the role of portfolio manager in active bond portfolio management, which we would like you to extend the analysis by addressing the following questions.
Explain intuitively how the forecasts of yield curve changes can add value to active bond portfolio management.
Are bond markets efficient? Express your views on this issue and provide appropriate argumentation backed by an overview of the relevant literature.
Given your answer to (2) and the empirical evidence provided by Frank J. Jones (cited above) describe how the information that total return on Treasury portfolio can be effectively explained by parallel shifts, twists and butterfly changes in yield curve and how this can be used by portfolio managers in managing bond portfolios.
As a general matter, discuss broadly the role of a portfolio manager in active bond portfolio management in the light of the efficient market hypothesis.
Your answers and solutions to the above two parts of this assessment should be placed in a Research Report. It should have the following structure:
Title page – report title, your name and submission date
Table of content
Main body – you should include here the answers and solutions to the two parts of this assessment presented above; a separate subsection should be devoted for each part
References
Appendix (optionally) – information that supports your analysis but is not essential to its explanation, you can list here for example the attachments and explain what each attachment contains