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Question:
Discuss about the :-

Gender Diversity in Investment Management:

New Research for Practitioners on How to Close the Gender Gap.

ESG integration and the investment management process:

Answer:
Question 1:
a. Calculating bond prices and depicting yield curve:

Maturity (years)

Market Price of Bond

0.50

100.69

1.00

103.34

1.50

100.80

2.00

102.47

2.50

99.67

3.00

103.55

3.50

103.43

4.00

103.08

4.50

100.25

5.00

100.65

5.50

101.56

6.00

102.00

6.50

100.00

7.00

99.50

7.50

100.47

8.00

101.54

8.50

99.74

9.00

100.68

9.50

100.13

10.00

99.76

The general shape of the yield is approximately, as the above figure. However, the curve is mainly smooth and tends to increase with tenure and decline after some years. The change in bond prices and income tends to alter the YTM of the bond investment.

b. Calculating Yield to maturity:

Maturity (years)

Semi-annually yield

0.50

0.24%

1.00

-0.71%

1.50

0.84%

2.00

1.00%

2.50

1.01%

3.00

1.66%

3.50

1.86%

4.00

1.95%

4.50

1.32%

5.00

1.49%

5.50

1.83%

6.00

2.02%

6.50

1.37%

7.00

1.20%

7.50

1.56%

8.00

2.04%

8.50

1.41%

9.00

1.79%

9.50

1.61%

10.00

1.53%

c. Constructing arbitrage portfolio:

Bonds

T

FV

Price

Coupon rate

Rate

Duration

Weights

GSBS18

0.50

100.00

100.69

3.25%

0.24%

0.49

20%

GSBE19

1.00

100.00

103.34

5.25%

0.71%

0.99

20%

GSBS19

1.50

100.00

100.80

2.75%

0.84%

1.47

20%

GSBG20

2.00

100.00

102.47

4.50%

1.00%

1.93

20%

Zero coupon bond

2.00

100.00

95.00

-   

1.01%

2.00

20%

Portfolio Duration

 1.38

 

 

 

 

 

 

With the use of equal weights, the portfolio duration calculated for the above arbitrage position is mainly at the levels of 1.38. This mainly helps in understanding the minim tenure which is used in deriving the returns from investment.

Question 2:
a. Relationship between HPR and changes in the YTM:

Bond

Maturity (Years)

Face Value

Coupon

YTM

Bond price

GSBE47

10.00

100.00

3.00%

1.53%

           99.76

Increase in YTM

Year

Cash Inflow

0.00%

0.25%

0.50%

0.75%

1.00%

1

 3.00

         3.4379

       3.4391

       3.4403

        3.4414

            3.4426

2

 3.00

         3.3863

       3.3873

       3.3883

        3.3893

            3.3904

3

 3.00

         3.3354

       3.3363

       3.3372

        3.3380

            3.3389

4

 3.00

         3.2853

       3.2860

       3.2868

        3.2875

            3.2882

5

 3.00

         3.2359

       3.2365

       3.2371

        3.2377

            3.2384

6

 3.00

         3.1873

       3.1878

       3.1883

        3.1887

            3.1892

7

 3.00

         3.1394

       3.1398

       3.1401

        3.1405

            3.1408

8

 3.00

         3.0922

       3.0925

       3.0927

        3.0929

            3.0932

9

 3.00

         3.0458

       3.0459

       3.0460

        3.0461

            3.0462

10

103.00

103.0000

103.0000

103.0000

103.0000

103.0000

Total Payment

    132.1455

   132.1511

   132.1567

    132.1623

       132.1679

Decrease in YTM

Year

Cash Inflow

0.00%

0.25%

0.50%

0.75%

1.00%

1

 3.00

 3.4379

 3.4368

 3.4356

 3.4345

 3.4333

2

 3.00

 3.3863

 3.3853

 3.3842

 3.3832

 3.3822

3

 3.00

 3.3354

 3.3345

 3.3336

 3.3328

 3.3319

4

 3.00

 3.2853

 3.2845

 3.2838

 3.2831

 3.2823

5

 3.00

 3.2359

 3.2353

 3.2347

 3.2341

 3.2335

6

 3.00

 3.1873

 3.1868

 3.1863

 3.1859

 3.1854

7

 3.00

 3.1394

 3.1390

 3.1387

 3.1383

 3.1380

8

 3.00

 3.0922

 3.0920

 3.0918

 3.0915

 3.0913

9

 3.00

 3.0458

 3.0457

 3.0455

 3.0454

 3.0453

10

103.00

103.0000

103.0000

103.0000

103.0000

103.0000

Total Payment

 132.1455

 132.1399

 132.1344

 132.1288

 132.1232

The evaluation of above table mainly helps in understanding the relationship between HPR and YTM. Therefore, any kind of increment or decline in YTM will directly affect the end payment of the bond. Hence, it could be assumed that there is a direct relationship between YTM and HPR (Van, Plantinga and Scholtens 2016).

b. Repeating the process with short sell:

Bond

Maturity (Years)

Face Value

Coupon

YTM

Bond price

GSBE47

10.00

100.00

3.00%

1.53%

99.76

GSBG25

5.00

100.00

3.25%

1.49%

 100.65

Year

GSBE47

GSBG25

Cash Inflow

0.00%

0.25%

0.50%

0.75%

1.00%

1

3

3.25

                   (0.25)

       (0.2865)

       (0.2866)

       (0.2867)

       (0.2868)

       (0.2869)

2

3

3.25

                   (0.25)

       (0.2822)

       (0.2823)

       (0.2824)

       (0.2824)

       (0.2825)

3

3

3.25

                   (0.25)

       (0.2780)

       (0.2780)

       (0.2781)

       (0.2782)

       (0.2782)

4

3

3.25

                   (0.25)

       (0.2738)

       (0.2738)

       (0.2739)

       (0.2740)

       (0.2740)

5

3

103.25

              (100.25)

  (108.1336)

  (108.1539)

  (108.1743)

  (108.1946)

  (108.2149)

6

3

0

                     3.00

         3.1873

         3.1878

         3.1883

         3.1887

         3.1892

7

3

0

                     3.00

         3.1394

         3.1398

         3.1401

         3.1405

         3.1408

8

3

0

                     3.00

         3.0922

         3.0925

         3.0927

         3.0929

         3.0932

9

3

0

                     3.00

         3.0458

         3.0459

         3.0460

         3.0461

         3.0462

10

103.00

0

                103.00

    103.0000

    103.0000

    103.0000

    103.0000

    103.0000

 

 

 

Total Payment

         6.2107

         6.1912

         6.1718

         6.1523

         6.1328

c. Relationship between HPR and changes in the Coupon rate:

Bond

Maturity (Years)

Face Value

Coupon

YTM

Bond price

GSBE47

10.00

100.00

0.03

0.02

99.76

Increase in Coupon rate

Year

Cash Inflow

0.00%

0.25%

0.50%

0.75%

1.00%

1

3.00

         3.4379

       3.4465

       3.4551

        3.4637

            3.4723

2

3.00

         3.3863

       3.3948

       3.4032

        3.4117

            3.4201

3

3.00

         3.3354

       3.3437

       3.3521

        3.3604

            3.3688

4

3.00

         3.2853

       3.2935

       3.3017

        3.3099

            3.3181

5

3.00

         3.2359

       3.2440

       3.2521

        3.2602

            3.2683

6

3.00

         3.1873

       3.1953

       3.2032

        3.2112

            3.2192

7

3.00

         3.1394

       3.1473

       3.1551

        3.1629

            3.1708

8

3.00

         3.0922

       3.1000

       3.1077

        3.1154

            3.1232

9

3.00

         3.0458

       3.0534

       3.0610

        3.0686

            3.0762

10

3.00

    103.0000

103.0075

103.0150

103.0225

       103.0300

 Total Payment

    132.1455

132.2259

132.3063

132.3866

       132.4670

Decrease in Coupon rate

Year

Cash Inflow

0.00%

0.25%

0.50%

0.75%

1.00%

1

3.00

         3.4379

       3.4293

       3.4208

        3.4122

            3.4036

2

3.00

         3.3863

       3.3778

       3.3694

        3.3609

            3.3524

3

3.00

         3.3354

       3.3271

       3.3187

        3.3104

            3.3020

4

3.00

         3.2853

       3.2771

       3.2689

        3.2606

            3.2524

5

3.00

         3.2359

       3.2278

       3.2197

        3.2116

            3.2036

6

3.00

         3.1873

       3.1793

       3.1714

        3.1634

            3.1554

7

3.00

         3.1394

       3.1316

       3.1237

        3.1159

            3.1080

8

3.00

         3.0922

       3.0845

       3.0768

        3.0690

            3.0613

9

3.00

         3.0458

       3.0382

       3.0305

        3.0229

            3.0153

10

3.00

103.0000

102.9925

102.9850

102.9775

102.9700

 Total Payment

132.1455

132.0652

131.9848

131.9044

131.8241

Question 3:
a. Using present yield curve for detecting present value of the liability:

Liability

F(L)

         100,000,000

t

1

Yield

2.62%

PV(L)

     97,451,639.62

b. Calculating weights of the portfolio:

Bond 1

F

100

c

2.75%

t

4.50

C

1.375

P1

                            90.65

Bond 2

F

100

c

3.25%

t

5.00

C

1.625

P1

                          100.49

 

 

Cash Flow

 

 

Time (year)

B1

B2

L

checking

4.50

101.375

1.625

0

0

5.00

0

101.625

100,000,000

100,000,000

 

Bond Portfolio

No of bond

bond price

$ invest

B1

-15773.27734

90.65410927

-1429912.407

B2

984009.8401

100.4883773

98881552.03

B

 

97451639.62

97451639.62

c. Calculating PV of the liability and weights of the portfolio if yield curve shifts down size by 100 basis points:

Liability

F(L)

         100,000,000

t

1

PV(L)

     97,476,480.14

Bond 1

F

100

c

2.75%

t

4.50

C

1.375

P1

90.75

Bond 2

F

100

c

3.25%

t

                  5.00

C

1.625

P1

             100.52

 

 

Cash Flow

 

 

Time (year)

B1

B2

L

checking

4.50

101.375

1.625

0

0

5.00

0

101.625

100,000,000

100,000,000

Bond Portfolio

No of bond

bond price

$ invest

B1

-15773.27734

90.75425759

-1431492.075

B2

984009.8401

100.52

98907972.22

B

 

           97,476,480

           97,476,480

From the overall evaluation, it could be identified that the hedge was held effectively, where the losses from the bond hedge was minimised from the portfolio weights. This might help in minimising the risk from changing YTM rates. In this context, Fender et al. (2016) stated that with the use of hedging measures investors are able to minimise the risk from investment and maximise their profitability.

References:

Fender, R., Adams, R., Barber, B. and Odean, T., 2016. Gender Diversity in Investment Management: New Research for Practitioners on How to Close the Gender Gap. Research Foundation Briefs, 5(1), pp.1-16.

van Duuren, E., Plantinga, A. and Scholtens, B., 2016. ESG integration and the investment management process: Fundamental investing reinvented. Journal of Business Ethics, 138(3), pp.525-533.

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