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# FIN205 Business Finance For Economical Position Of The Australian Market

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• Course Code: FIN205
• University: Charles Darwin University
• Country: Australia

## Questions:

a. Pick the month you were born (it’s 19 september) Draw the yield curve for that month in 2008 and 2009. Also, draw the yield curve for the month falling exactly in the middle. (For instance, if you were born in April, draw the yield curves for April 2008, October 2008 and April 2009.)

b. What should be the shape of the yield curve under normal circumstances? Why?

c. Compare the shapes of the three yield curves that you have drawn. From the yield curves, can you infer anything about the market’s expectation about the future of Australian economy?

d. What is the yield on 2-year bond in January 2008? Under the expectations theory, what interest rate do investors expect on a 1-year bond next year (i.e., January 2009)? Using the same method calculate the expected interest rates on 1-year bonds for all the months of 2009.

e. How do the expected interest rates compare with the actual interest rates in 2008? Do your calculations validate/not validate the expectations theory? List some possible reasons why the expectations hypothesis may not hold.

f. For 3, 5 and 10 year bonds what was the average spread between Australian Government Bonds and NSW Treasury bonds?

g. Draw a graph plotting the spread between Australian Government Bonds and NSW Treasury Bonds. Comment on the pattern of the spread. Can you provide an explanation for this pattern?

## Answer:

Under the normal circumstance, a yield curve always shows the upward graph and it briefs the long term investment always offers more return to the investors than the short term investment (Horngren, 2009).

### Part c:

On the basis of the given graph, it has been found that the slopes are showing the increased position at initial stage but along with the time, the slopes are offering the upwards position. It expresses that the long term investment into the Australian market would offer improved return (Jiashu, 2009). It also explains that the economical position of the Australian market has been improved.

### Part d:

The 2 years bond yield rate of Australia market in the year of 2008 has been described in the below table. The expectation theory explains that along with the time, the worth of the money get reduced and thus for the compensation and for the long term investment, the return of the investment is always higher. On the basis of the expectation theory, an improved rate of return is expected in the year of 2009. The expectation has been shown in the below graph in part e. The expectation hypothesis sometime not holds because of the fluctuations in the economical factors and the international market changes (Higgins, 2012).

 two year's bond yield (2008) Year-1 Year-2 Actual interest rate Year 2 Actual interest rate Year -1 Expected Interest rate Jan-2008 6.83% 6.61% 1.1365 1.0683 1.0638 Feb-2008 7.12% 6.82% 1.1411 1.0712 1.0652 Mar-2008 7.03% 6.30% 1.13 1.0703 1.0558 Apr-2008 7.21% 6.33% 1.1306 1.0721 1.0546 May-2008 7.35% 6.60% 1.1364 1.0735 1.0585 Jun-2008 7.26% 6.97% 1.1442 1.0726 1.0668 Jul-2008 6.87% 6.64% 1.1372 1.0687 1.0641 Aug-2008 6.34% 5.83% 1.12 1.0634 1.0532 Sep-2008 5.63% 5.51% 1.1133 1.0563 1.0539 Oct-2008 4.33% 4.35% 1.0889 1.0433 1.0437 Nov-2008 3.09% 3.64% 1.074 1.0309 1.0419 Dec-2008 2.67% 3.07% 1.0624 1.0267 1.0347

 Yield on two year's bond Year-1 Year-2 Actual interest rate Year 2 Actual interest rate Year -1 Expected Interest rate Jan-2009 2.69% 2.83% 1.05741 1.0269 1.02971 Feb-2009 2.59% 2.80% 1.05685 1.0259 1.03017 Mar-2009 2.74% 2.87% 1.05826 1.0274 1.03004 Apr-2009 2.69% 3.16% 1.06419 1.0269 1.03631 May-2009 2.87% 3.46% 1.07039 1.0287 1.04053 Jun-2009 2.95% 3.90% 1.07961 1.0295 1.04867 Jul-2009 3.00% 4.04% 1.08242 1.03 1.0509 Aug-2009 3.19% 4.57% 1.09349 1.0319 1.05968 Sep-2009 3.23% 4.42% 1.0904 1.0323 1.05628 Oct-2009 3.66% 4.82% 1.09877 1.0366 1.05998 Nov-2009 3.73% 4.71% 1.09645 1.0373 1.05702 Dec-2009 3.83% 4.54% 1.09282 1.0383 1.05251

### Part e:

The expected rate of 2008 has been compared with the rate of 2009 to measure that whether the expectation in the next year is getting higher. And as described in the expectation theory that along with the time, the worth of the money get reduced and thus for the compensation and for the long term investment, the return of the investment is always higher; same has taken place in the Australian economical position (Hillier, Grinblatt and Titman, 2011).

### Part f:

The spread of both the economy of different years has been shown in the below table:

 spread between Australian Government Bonds and NSW Treasury bonds F2  CAPITAL MARKET YIELDS - GOVERNMENT BONDS Per cent per annum Australian Federal Government NSW Treasury Difference Years to Maturity Years to Maturity Years to Maturity Date 3 yrs 5 yrs 10 yrs 3 yrs 5 yrs 10 yrs 3 yrs 5 yrs 10 yrs Jan-2008 6.58 6.34 6.08 6.99 6.92 6.58 -0.41 -0.57 -0.50 Feb-2008 6.75 6.50 6.29 7.33 7.26 6.96 -0.59 -0.76 -0.67 Mar-2008 6.21 6.10 6.09 6.94 6.90 6.82 -0.74 -0.80 -0.73 Apr-2008 6.25 6.19 6.17 6.89 6.84 6.78 -0.64 -0.65 -0.61 May-2008 6.47 6.33 6.36 7.02 6.91 6.89 -0.54 -0.58 -0.54 Jun-2008 6.84 6.69 6.59 7.36 7.23 7.10 -0.52 -0.54 -0.51 Jul-2008 6.49 6.40 6.37 7.14 7.05 7.01 -0.65 -0.65 -0.64 Aug-2008 5.74 5.77 5.86 6.35 6.38 6.49 -0.62 -0.61 -0.63 Sep-2008 5.48 5.54 5.65 6.21 6.24 6.33 -0.73 -0.70 -0.69 Oct-2008 4.59 4.83 5.22 5.27 5.48 5.85 -0.68 -0.65 -0.63 Nov-2008 3.96 4.28 4.94 4.75 5.14 5.69 -0.79 -0.87 -0.75 Dec-2008 3.43 3.72 4.22 4.54 4.87 5.12 -1.10 -1.15 -0.90 Jan-2009 3.15 3.50 4.09 4.27 4.64 4.93 -1.12 -1.14 -0.85 Feb-2009 3.08 3.59 4.25 3.96 4.50 5.21 -0.88 -0.91 -0.95 Mar-2009 3.20 3.73 4.33 4.24 4.87 5.62 -1.05 -1.14 -1.29 Apr-2009 3.53 4.05 4.51 4.32 4.93 5.59 -0.79 -0.88 -1.07 May-2009 3.91 4.47 5.00 4.52 5.17 5.90 -0.61 -0.69 -0.90 Jun-2009 4.47 5.10 5.56 5.02 5.70 6.36 -0.55 -0.59 -0.81 Jul-2009 4.59 5.21 5.49 5.07 5.63 6.12 -0.48 -0.42 -0.63 Aug-2009 4.99 5.39 5.53 5.40 5.77 6.09 -0.41 -0.37 -0.55 Sep-2009 4.82 5.14 5.32 5.12 5.54 5.86 -0.31 -0.40 -0.54 Oct-2009 5.14 5.35 5.45 5.47 5.77 5.98 -0.33 -0.41 -0.53 Nov-2009 4.99 5.24 5.47 5.34 5.67 6.05 -0.35 -0.43 -0.58 Dec-2009 4.83 5.15 5.47 5.21 5.60 6.09 -0.39 -0.45 -0.62

The average spread rate of Australian and NSW market is -0.64, -0.68 and -0.71 in the year of 3, 5 and 10. It explains that the changes into the NSW economy is more improved (Madura, 2014).

### Part g:

The below graph represent the spread among both the economies:

On the basis of the above graph, it has been found that along with the time, the return of the economies has also been changed. It expresses that the changes into the NSW economy is more improved. The pattern explains better performance of NSW.
Question 2:

### Part a:

The below graph represent the stock of QAN and AMP.  On the basis of the below graph, it has been found that the current growth in the stock price of QAN is higher. The higher fluctuation and improvement has been seen in the stock price of the company in last 3 years. However, after the January, 2018, the stock price of AMP is getting reduced and explains decrement in the market position of the business (Gapenski, 2008).

### Part b:

 c ASX200 QAN.AX (\$A) AMP.AX (\$A) Jan-15 Feb-15 -0.63% -3.88% 7.96% Mar-15 -1.72% 2.07% 8.65% Apr-15 -0.22% 3.42% 3.83% May-15 -5.51% -9.61% -10.23% Jun-15 4.40% 9.80% 18.67% Jul-15 -8.64% -9.98% -10.40% Aug-15 -3.56% -6.55% 10.71% Sep-15 4.34% 5.54% -0.29% Oct-15 -1.39% 1.40% -7.85% Nov-15 2.50% 0.34% 12.36% Dec-15 -5.48% -7.89% -5.13% Jan-16 -2.49% -0.93% -0.52% Feb-16 4.14% 8.83% 5.44% Mar-16 3.33% 4.30% -20.88% Apr-16 2.41% -4.08% -4.35% May-16 -2.70% -8.51% -8.44% Jun-16 6.28% 12.60% 12.06% Jul-16 -2.32% -9.47% 2.53% Aug-16 0.05% 3.04% -3.70% Sep-16 -2.17% -13.45% 0.14% Oct-16 2.31% 2.84% 7.84% Nov-16 4.14% 7.23% 0.91% Dec-16 -0.79% -0.79% 2.40% Jan-17 1.62% -2.40% 9.97% Feb-17 2.67% 9.16% 3.73% Mar-17 1.01% 3.47% 11.07% Apr-17 -3.37% -5.78% 18.16% May-17 -0.05% 2.77% 14.17% Jun-17 -0.02% 3.85% -6.99% Jul-17 -0.11% -5.38% 7.52% Aug-17 -0.58% -2.53% 1.92% Sep-17 4.00% 2.90% 6.81% Oct-17 1.03% 2.82% -7.80% Nov-17 1.59% 1.57% -11.11% Dec-17 -0.45% 1.16% 4.56% Jan-18 -0.36% 0.76% 11.76% Feb-18 -4.27% -3.05% -1.02% Mar-18 3.88% -19.04% 0.16% Apr-18 0.49% -3.47% 10.05% May-18 3.04% -8.72% -2.99% Jun-18 0.53% 0.00% 9.09%

 ASX200 QAN.AX (\$A) AMP.AX (\$A) Mean 0.17% -0.87% 2.46% Variance 0.10% 0.45% 0.77% Standard Deviation 0.032 0.067 0.088 Covariance 0.118% 0.061%

The above tables represent the return, mean, covariance, standard deviation, variance etc. the table brief that the mean, variance, standard deviation and covariance of QAN and AMP are -0.87% and 2.46%, 0.45% and 0.77%, 0.067 and 0.088 & 0.118% and 0.061%. However, the  mean, variance and standard deviation of ASX 200 is 0.17%, 0.10% and 0.032. It explains that the return of Amp is higher in the industry. Though, the associated risk of AMP is also higher. The standard deviation also explains that the risk position associated with AMP is highest in the industry. Further the covariance level of QAN is better (Lord, 2007). It leads to the conclusion that the performance of QAN is better in terms of overall management.

### Part c:

Calculation of beta:

 ASX200 QAN.AX (\$A) AMP.AX (\$A) Mean 0.17% -0.87% 2.46% Variance 0.10% 0.45% 0.77% Standard Deviation 0.032 0.067 0.088 Covariance 0.118% 0.061% Beta 1.172 0.610

### Part d:

The calculations in part C brief that the QAN is holding higher beta in the market. The beta of QAN and AMP is 1.172 and .610. The higher beta from 1 explains that the changes in the stock price are even higher than the index. It explains that the fluctuations and the risk of QAN market are higher.

### Part e:

CAPM calculations:

 Calculation of cost of equity (CAPM) QAN AMP Risk free rate (Bloomberg, 2018) 1.69% 1.69% RM 2.05% 2.05% Beta 1.172 0.610 Required rate of return 2.11% 1.91%

The CAPM calculations explain that the return from both the stock is 2.11% and 1.91% respectively. It further compares with the market price of the stock and explains that both of the stock is underpriced.

### Introduction:

The report mainly focuses on the past performance and future perspective of both the companies, QAN and AMP. The stock market, return, mean, risk, CAPM etc of both the companies have been evaluated to identify the performance of the companies.

### Analysis:

The stock fluctuations in both the stock, QAN and AMP have been studied firstly.  On the basis of the calculations, it has been found that the current growth in the stock price of QAN is higher. The higher fluctuation and improvement has been seen in the stock price of the company in last 3 years. The current trend in the AMP stock depicts the reduced price of the company (Lee and Lee, 2006).

The return, mean, covariance, standard deviation, variance etc. has been  evaluated further and it has been found that the mean, variance, standard deviation and covariance of QAN and AMP are -0.87% and 2.46%, 0.45% and 0.77%, 0.067 and  0.088 & 0.118% and 0.061%. It explains that the return of Amp is higher in the industry. Though, the associated risk of AMP is also higher (Lord, 207). The standard deviation also explains that the risk position associated with AMP is highest in the industry. Further the covariance level of QAN is better. It leads to the conclusion that the performance of QAN is better in terms of overall management

The calculations on beta comparison brief that the QAN is holding higher beta in the market. The beta of QAN and AMP is 1.172 and .610. It explains that the fluctuations and the risk of QAN market are higher (Madura, 2014).

The CAPM calculations further explain that the return from both the stock is 2.11% and 1.91% respectively. It further compares with the market price of the stock and explains that both of the stock is underpriced.

## Conclusion:

On the basis of the overall analysis on both the stocks, it has been found that QAN past performance has been improved a lot and it further explains that in near future, the performance and the stock position of the business would improve much.  Further, in case of Amp, it could be concluded that from last few months, the position of the company has been reduced but the strategies and management plan would help the business to cover up soon and the performance of the company would be stable again.

## References:

Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.

Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Jiashu, G., 2009. Study on Fair Value Accounting——on the essential characteristics of financial accounting [J]. Accounting Research, 5, p.003.

Lee.C.F and Lee, A, C,.2006. Encyclopedia of finance, Springer science, new York

Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3 (2) p. 6.

Lumby,S and Jones,C,.2007. Corporate finance theory & practice, 7th edition, Thomson, London

Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.

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