BA7032 Financial Modeling Excel Assignment

Problem 1: Yield to Maturity Calculation for a Bond

This is an individual assessment contributing 50% of your marks for the BA7032 module. The assignment is intended to help you develop skills of implementing financial models in Excel.

The assignment provides you with an opportunity to produce spreadsheet applications that solve and analyse corporate finance problems. The deadline for submission is 13:00 10th of anuary 2022.

You are required to set up a separate worksheet (spreadsheet model) for each of the following four problems:
1) Calculate the yield to maturity of a 7-year $1,000 par value bond with a fixed annual coupon rate of 6.5250% and a current price of $950.00. Provide the solutions for both annual and semi-annual payments of interest. Comment on the relationship between the yield to maturity and the frequency of interest payments, providing an appropriate table or graph. (20%)

2) Obtain from Bloomberg (or Datastream, or Thomson ONE Banker, or Yahoo!Finance) the beginning of month values for the period 2002-2020 of both EURONEXT 100 (^N100) index and KBW Nasdaq Bank Index (^BKX).

Assume that you are a risk-averse investor.
For each of the two assets represented by the indices, calculate annual returns and build a frequency distribution of annual returns. Provide graphs of the distributions.

Explore the risk-return relationship for the two assets. Plot your results on a graph with the standard deviation of annual returns of each asset on the horizontal axis and the average annual return on the vertical axis, and comment on which asset performed better.

Assume that you form a portfolio by investing equal amount of money in each asset. Determine the average and standard deviation of the portfolio’s annual returns. Provide your interpretation of the risk and return of the equally-weighted portfolio compared to those of the individual assets.

Calculate and graph the average annual returns and standard deviations of all portfolios that are combinations of EURONEXT 100 (^N100) index and KBW Nasdaq Bank Index (^BKX), with the proportion of EURONEXT 100 (^N100) index being 0, 10, 20, 30, 40, 50, 60, 70, 80, 90, 100%. Comment on the profile
of the portfolios. (35 %)

3) For the most recent ten-year period, collect from Bloomberg (or Datastream, or Thomson ONE Banker, or Yahoo!Finance) end-of-year values of NASDAQ 100 (^NDX) index and end-of-year prices of ANY TWO of the member stocks of the NASDAQ 100 (^NDX) index. Collect also the latest prices for those two the
NASDAQ 100 (^NDX) index stocks.

Assume that the NASDAQ 100 (^NDX) represents the market portfolio. Compute the excess returns of each of the two stocks that you have selected against that of the NASDAQ 100 (^NDX). Use the relevant short-term Treasury Bill rate as the risk-free rate in the capital asset pricing model (CAPM).

Using the CAPM framework and regression analysis, provide the estimates of both systematic risk and theoretical return for the selected two stocks.

Discuss the results. Explain which of the two stocks has more systematic risk. (35%)
4) Suppose today is the 25th of August 2021. The January 20 th, 2023, call option on Amazon.com, Inc. (AMZN) common stock is priced at $426.80. The exercise price of the call option is $3,300. The expiry date of the option is January 20th 2023. The 25th of August 2021 price of Amazon.com, Inc. common stock is $3,299.18. The risk-free rate is 1.70%.

You are required to derive the implied volatility ? (sigma) of the underlying asset from the current market price of the January 20 th, 2023 call option on Amazon.com, Inc. common stock.

Assume an 18% starting value for ? to set up a theoretical model of the price of the call option. Assume the stock does not pay a dividend before the expiry date. Comment on the results. (10%)

Key skills
This assignment will help you develop the following key skills:
• Communication
• Numeracy
• Proficiency in Information Communication Technology (ICT)
•Abstract thought and analytical skills necessary for analysis and interpretation of financial and business information.