Determine holding period returns for bhp billiton ltd

Reference no: EM131044165

Assessment Task - Valuation Assignment

Q1. Portfolio Valuation - General & Practical

You have used Yahoo7 Finance to determine holding period returns for BHP Billiton Ltd and Commonwealth Bank of Australia. In this assessment, you will gain further experience of using the resource.

Assume that you are acting as financial analyst for a firm. You have been assigned $100k by your supervisor. Your task is to develop a portfolio consisting of shares from three companies - BHP Billiton Ltd (symbol: BHP.AX), Commonwealth Bank of Australia (symbol: CBA.AX), and Myer Holdings Ltd (symbol: MYR.AX). As part of this task, you note the closing prices of these shares on 1 Dec 2014 and 1 Dec 2015. You presume that the expected return of these shares are the same as holding period return of these shares over the period 1 Dec 2014 - 1 Dec 2015 (the holding period returns are to be calculated based upon closing prices at these two dates and dividends attained between these two dates).

You are considering the following investment choices.

Investment Choice	Percentage of $100k invested in BHP.AX	Percentage of $100k invested in CBA.AX	Percentage of $100k invested in MYR.AX
A	15%	80%	5%
B	10%	80%	10%
C	5%	80%	15%

(a) Given the information and presuming expected return of the portfolio as the selection criteria, which of the above investment choices will you adopt?

(b) Suppose, you are also given the following (hypothetical) information:

Share	β
BHP.AX	1.10
CBA.AX	0.85
MYR.AX	2.00

If you are risk averse, will your investment choice change due to the above-indicated information for β? Why or why not?

Q2. Bond Valuation - General

Suppose an investor is considering investment in the following three bonds:

Bond A: This coupon bond has a face value of $1000 and coupon of 4.5% paid semi-annually. The bond matures in 10 years.

Bond B: This is another coupon bond, which also has a face value of $1000 and coupon of 4.5% paid semi-annually. However, it matures in 20 years.

Bond C: This is a zero-coupon bond, which also has a face value of $1000.It matures in 10 years. Interest is compounded semi-annually.

Suppose, the investor evaluates the bonds for the following sets of market interest rates (i.e., i in the Bond formula):

3.5%

4.5%

6.5%

10.0%

Given the above information:

Discuss how the prices for these bonds change with the market interest rate. In your discussion, also indicate whether there is any difference between the bonds in respect to these changes of price. Further, indicate how the changes in market interest rate may relate to the investor's investment decision.

Q3. Bond Valuation- Practical

Instructions

For this question, you will get both an experience of using computer software to solve financial problems and also using online resources in financial modelling. Indeed, most of the modern corporates employ some kind of software (and relevant finance functions) in relation to finance issues.

Microsoft Excel:

A particular software possessing many finance function facilities is Microsoft Excel (which, as indicated on course profile, is one of the required IT resources). However, another option is OpenOfficeCalc (which is an open-source and free software compatible to Excel). The OpenOfficeCalc (part of Apache OpenOffice suit) may be downloaded from:

https://www.openoffice.org/download/index.html

The software you will need for this question is either Microsoft Excel or OpenOfficeCalc (i.e., any one of these two). First, please note the following links to relevant documentations:

https://support.office.microsoft.com/en-AU/article/rate-function-9f665657-4a7e-4bb7-a030-83fc59e748ce (for Microsoft Excel)

https://wiki.openoffice.org/wiki/Documentation/How_Tos/Calc:_RATE_function (forOpenOfficeCalc)

The above links show the function to determine the interest rate per period (i/m), given present value (PV), future value (FV), payment (C), and total number of periods (m x n).

As for the symbols shown within brackets in the previous line, please note that these relate to the "Price of a bond making multiple payments each year" formula within the formula sheet.

BOND MARKET:

Similar to share market, a small-scale bond market also exists in Australia. Please browse the ASX website on Treasury Bonds:

https://www.asx.com.au/asx/markets/interestRateSecurityPrices.do?type=GOVERNMENT_BOND

Please note the bonds, codes of which start with "GSB". Select any one of these treasury bonds, for which the face value is $100 and maturity date is beyond 2016. For the bond you have selected, please also note that the coupon rate, next payment date and payment frequency.

The Problem to Solve:

For the bond you have selected, using either Microsoft Excel or OpenOfficeCalc's RATE function, determine the YTM of the bond if you purchase it at the price of:

i. $95 on 20Mar 2016

ii. $110 on 20 Oct 2016

Reference no: EM131044165

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