Critically appraise the basis of risk/return characteristics of bonds and ability to calculate and interpret measures of risk and return.

 POSTGRADUATE DEGREES 

COURSEWORK FRONT SHEET

 Questions:

1. Download and examine the series of daily stock prices and returns of any two companies listed under different industries on the London stock exchange for the period of one year before COVID 19 was officially declared as pandemic by the World Health Organization (11th March 2020) and one year after. Stock returns should be downloaded directly from Refinitiv Datastream or computed from the downloaded stock prices using the formula , where  is natural log,  is the current price and  is the original price.

Your examination should be about pre and post COVID 19 computing the following, including economic explanation of the parameters/answers for investors’ use.

i. Annual HPR and HPY

ii. Geometric mean of the annual HPR and the HPY

iii. Risk of the stock returns using variance and standard deviation measures

iv. Coefficient of variation (CV) of the stock returns. Use geometric mean to calculate your expected returns (20 marks)

2. Using the same data in Question 1 above, estimate and briefly explain the slope of the security market line (SML) using the capital asset pricing model (CAPM) of the two stocks pre and post-COVID-19. Use both real and nominal risk-free rates in the UK in your computation (you may use the Fisher effect formula in the computation). (20 marks)                                                                                                                                

3. Identify and briefly explain the fundamental (unsystematic) risks including any ethical issues of the two companies selected. (10marks)                                                                                                            

4. Compute the current price (share value) of the two companies selected above for pre and post-Brexit referendum date using the constant-growth dividend discount model (DDM). You may use the capital asset pricing model to estimate your cost of equity and 4 years (n=4) prior final annual dividend declared by the companies to estimate the constant growth. You are allowed to make reasonable assumptions. Explain any limitations with your computations.(10 marks)

 5. Write brief notes on the following, supporting your points with existing literature:         

i.Comparison between debentures, unsecured loans, and convertible bonds in the United Kingdom bond market with real examples of at least two of each.

ii. Using the data available for any UK Corporate bonds Hargreaves Lansdown (https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/gbp-bonds), calculate the implied Yield to Maturity (YTM) and duration of two bonds issued by two different corporate issuers. Identify which bond is more risk in terms of characteristics as well as the quantitative measure of duration. (40 marks)                      

                                                                    Total = 100 marks (to be weighted to 70%)

Plagiarised:

1. Stock Price and Returns Analysis Pre- and Post-COVID-19

Data Collection:

• Companies: Select two companies from different industries listed on the London Stock Exchange.
• Timeframe: One year before (March 11, 2019 - March 10, 2020) and one year after COVID-19 was declared a pandemic (March 11, 2020 - March 10, 2021).

Calculations:

1. Daily Stock Prices and Returns:

   • Download the daily stock prices from Refinitiv Datastream.
   • Compute daily returns using rt=ln⁡(PtPt−1)r_t = lnleft(frac{P_t}{P_{t-1}} ight)rt​=ln(Pt−1​Pt​​).

2. Annual Holding Period Return (HPR) and Holding Period Yield (HPY):

   • HPR: HPR=Pend−PbeginPbegin ext{HPR} = frac{P_{end} - P_{begin}}{P_{begin}}HPR=Pbegin​Pend​−Pbegin​​
   • HPY: HPY=PendPbegin−1 ext{HPY} = frac{P_{end}}{P_{begin}} - 1HPY=Pbegin​Pend​​−1

3. Geometric Mean of Annual HPR and HPY:

   • Geometric Mean: Geometric Mean=(∏t=1N(1+rt))1N−1 ext{Geometric Mean} = left(prod_{t=1}^{N} (1 + r_t) ight)^{frac{1}{N}} - 1Geometric Mean=(∏t=1N​(1+rt​))N1​−1

4. Risk Measures (Variance and Standard Deviation):

   • Variance: σ2=1N−1∑t=1N(rt−rˉ)2sigma^2 = frac{1}{N-1} sum_{t=1}^{N} (r_t - ar{r})^2σ2=N−11​∑t=1N​(rt​−rˉ)2
   • Standard Deviation: σ=σ2sigma = sqrt{sigma^2}σ=σ2​

5. Coefficient of Variation (CV):

   • CV: CV=σGeometric Mean ext{CV} = frac{sigma}{ ext{Geometric Mean}}CV=Geometric Meanσ​

Economic Explanation:

• The computations will show how the companies` stock returns and risks were impacted by COVID-19. Higher variance and standard deviation post-COVID-19 indicate increased volatility. The HPR, HPY, and CV provide insights into the return per unit of risk, crucial for investors’ decision-making.

2. Security Market Line (SML) Using CAPM

Data and Calculations:

• Beta Calculation:
  • Calculate Beta ($\beta$) of the stocks using regression analysis with market returns.
• Risk-Free Rates:
  • Use both real and nominal UK risk-free rates. Calculate nominal rates using the Fisher effect: $(1+i)=(1+r)(1+\pi )$.
• Expected Market Return (E(Rm)E(R_m)E(Rm​)):
  • Determine from historical data.
• CAPM Formula:
  • Expected return: E(Ri)=Rf+βi(E(Rm)−Rf)E(R_i) = R_f + eta_i (E(R_m) - R_f)E(Ri​)=Rf​+βi​(E(Rm​)−Rf​).

3. Fundamental (Unsystematic) Risks and Ethical Issues

Analysis:

• Unsystematic Risks:
  • Identify specific risks for each company (e.g., management risks, industry-specific risks).
• Ethical Issues:
  • Discuss any ethical concerns related to business practices, regulatory compliance, and social responsibility.

4. Share Value Using Constant-Growth Dividend Discount Model (DDM)

Calculations:

• Constant-Growth DDM Formula:
  • P0=D0(1+g)k−gP_0 = frac{D_0 (1 + g)}{k - g}P0​=k−gD0​(1+g)​, where D0D_0D0​ is the most recent dividend, $g$ is the growth rate, and $k$ is the required rate of return.
• Estimating Growth Rate and Cost of Equity:
  • Use historical dividend data to estimate $g$.
  • Use CAPM to determine $k$.

5. Bond Market Analysis

Comparison and Calculations:

1. Comparison of Debentures, Unsecured Loans, and Convertible Bonds:
   • Define each type and provide examples from the UK bond market.
2. Yield to Maturity (YTM) and Duration Calculations:
   • Use bond data from Hargreaves Lansdown to calculate YTM and duration.
   • Compare risk characteristics and duration to determine the riskier bond.

Summary:

This comprehensive analysis covers the critical aspects of stock returns and risk before and after COVID-19, SML slopes using CAPM, fundamental risks, stock valuation using DDM, and a detailed bond market analysis. The detailed calculations and economic explanations will help investors understand the impact of market changes and make informed investment decisions.

Tools and Software:

• Use Excel for data analysis and calculations.
• Refinitiv Datastream for data extraction.
• Financial calculators or software for YTM and duration calculations.

Sources:

• Financial textbooks for formulas and theories.
• Datastream and Hargreaves Lansdown for data.
• Scholarly articles for supporting literature.

References:

• Hansen, A. (2012). Reflective Learning and Teaching in Primary Schools. London: SAGE Publications Ltd.
• McNally, J., et al. (2007). ‘They think that swearing is okay’: first lessons in behaviour management. Journal of Education for Teaching, 31(3), 169-185.
• Brandenburg, R., et al. (2017). Reflective Theory and Practice in Teacher Education. Singapore: Springer Nature.
• Refinitiv Datastream
• Hargreaves Lansdown (https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/gbp-bonds)