Answer

SEMESTER TWO PHASE TEST – August 2020

 REFER / DEFER

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EXAM REGULATIONS:

1. The University Regulations on academic conduct, including cheating and plagiarism, apply to all examinations.

2. The normal examination regulations of the University apply

INSTRUCTIONS TO CANDIDATES

1. Please do NOT start writing until told to do so by the Invigilator.

1. Candidates must NOT use red ink on the script answer book.

1. The memory of any programmable/graphical calculator used during this examination must be cleared before the start of the paper. You must answer all questions and all answers should be written on this paper in the space provided.

1. You must answer all questions and all answers should be written on this paper in the space provided.

1. This is a closed book test. No reference material may be used for the test.

1. You are to show all calculations and your methodology where numerical calculations are required. Three blank workings sheets have been included at the back of the paper for you to use, if required. Please ensure that at the end of the Phase Test these are still securely attached to your answer sheet.

1. Discount Tables and Tables of Normal Distribution are attached to this test paper for your use.

PLEASE WRITE YOUR NAME & STUDENT NUMBER HERE: 

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QUESTION 1   ( 6 marks )

Use the following information for a bond to calculate:

1. a) the Macaulay Duration of the bond and;

1. b) the Modified Duration of the bond explaining the significance of modified duration

• 5 year maturity
• Coupon of 10%
• 6% yield to maturity

Note:  For the modified duration you may assume a change in yield of 1%

Macaulay Duration = (5*10)/ (1.06) ^5 + (1*100)/(1.06)^5/ 100 = 1.12

Modified Duration = Macauley duration/ (1 + YTM/N)

Modified duration = 1.12 / ((1+0.07/5) = 5.23 Years

QUESTION 2         ( 4 MARKS )

After considering 2 years of data, a Fund Manager has determined that when his portfolio makes a loss, the average loss is £75,000 and the standard deviation is £3,000 per week.

1. With the use of Z scores, determine the maximum weekly loss both at 95% and a 99% confidence level.

1. What are the limitations of this methodology?

Z score = (Observed Value – Mean of the Sample)/ Standard Deviation of the Sample

Z Score at 95% confidence level = 1.96 – £ 84,000

Z Score at 99% Confidence Level = 2.58 = – $78,000

The main limitation of the methodology is that it always assumes a normal distribution.