IC314 Bond and Money Markets Assessment Individual Project Report 2025 - Henley Business School (HBS)

Assessment Brief

Module Code and Title	IC314 Bond and Money Markets
Module Convenor	Dr. Ivan Sangiorgi
Type of Assessment	Individual Project Report
Weighting of Assessment	70%
Submission Deadline	28th January 2025 at 12:00 pm – Make sure you submit by 11.59 am
Submission Point (Blackboard/Turnitin/Other)	Blackboard
Items to be Submitted	An Excel spreadsheet and a Word document
Individual or Group Assessment	Individual
Module Convenor Office Hours/Opportunities for advice and feedback	Please refer to the office hours posted on Blackboard for the module convenor and the teaching assistant

1. What is the purpose of this assessment? 

The following table shows which of the module learning outcomes are being assessed in this assignment. Use this table to help you see the connection between this assessment and your learning on the module.

Module Learning Outcomes being assessed

By the end of the module, it is expected the students will:  • Define the main aspects of the economic theories of the determination of interest rates, money market rates, bond yields and their interlinkages with central bank monetary policy operations. • Evaluate economic situations to determine the likely implications for bonds and money market instruments, with real-world examples taken from a variety of bond and money markets across the world. • Explain and apply common trading strategies and portfolio management strategies of bond and money markets, and the key features of funding liquidity management.

2. What is the task for this assessment?

Task (attach an assignment brief if required)

As part of this project, you will need to answer questions 1 and 2 (mandatory), plus 2 questions of your choice among questions 3, 4, 5 and 6 shown below, for a total of 4 questions. 

 

Mark Weights for each question and sub-question:

Question 1: 35% in total. Question 1 A: 15%; Question 1 B: 20%.

Question 2: 15%: Question 1 A: 12%, Question 1 B: 3%.

Questions 3, 4, 5, and 6: 25% each, so 50% in total.

Question 3, A: 10%, Question 3, B: 10%, Question 3, C:5%

Question 4, A: 10%, Question 4, B: 10%, Question 4, C:5%

Question 5, A: 10%, Question 5, B: 10%, Question 5, C:5%

Question 6, A: 10%, Question 6, B: 10%, Question 6, C:5%

 

Question 1 - Fixed Income Portfolio Construction and Allocation (compulsory)

Assume you are writing a report advising an asset management firm for its proprietary book. The asset management firm is re-evaluating its fixed-income portfolio allocation and trading strategies of fixed-income securities in one of its portfolios. The assets under management of this portfolio are US $500 million and should be all allocated to only fixed income and money market securities.

Please carry your computations in US dollars for questions 1 and 2. Use exchange rates as of 28 October 2024 for securities denominated in different currencies.

A. Your first task is to suggest a list of securities for the portfolios using 10 securities and indicate optimised allocation across the selected securities. You should assume that your analysis is conducted on 28th October 2024 as the settlement date (end of day). All the data you need to collect will have to be consistent with the settlement date. Please clearly state the source of data and describe the data used. State the assumptions, if any, you need to make to carry out your calculations and explain why, in your opinion, they are sensible. 

Please provide a description of each security and corresponding ISIN/CUSIP (identifier of the securities). Please provide a rationale for the selection of issuers/countries in your portfolio. Report bond prices or yields, and compute price or yields (based on the information you source), duration, modified duration, convexity, and price sensitivity for each security. For calculation purposes of bonds, use the day count convention Actual/Actual if required and the appropriate day count convention for zero-coupon bonds.

The risk management and diversification targets specify the following allocation requirements. To construct the portfolio (part A and B), you need to apply the constraints reported below:

•     You should use only sovereign bonds that pay a fixed coupon (annual or semi-annual coupon payment frequency) or sovereign zero-coupon bonds or treasury bills. Inflation-linked bonds are not allowed.

•     You need to include at least the following: one zero-coupon bond, 2 German Bunds with remaining years to maturity in the range 8.5-10.5, one US Treasury bond with 10-year residual maturity (or in the range 8.5-10.5), and one US treasury bond with 2-year residual maturity (or in the range 1.5-2.5 years)

•     Every security must have a positive allocated amount equal to or greater than 2% of the overall asset under management in the portfolio.

•     No more than 30% to individual securities. No more than 10% to individual zero-coupon bonds. 

•     Include at least one sovereign bond or zero-coupon bond from the following list of countries: Canada, France, Italy, Japan, the UK, and Spain. 

•     Include only sovereign bonds or zero-coupon bonds from the following list of countries: the U.S., Germany, Canada, France, Italy, Japan, the UK, and Spain. 

•     You can decide whether you want to include all the countries or only some of the countries listed in the previous two bullet points. This means that you should have at least three different countries in your portfolio, US, Germany plus another one from the above list. Please do not choose countries not included in the list. 

B. Then, use the Excel Solver to determine the optimised asset allocation under these targets:

•     Target 1: the asset management firm has given a target to earn at least 4% as portfolio, while minimising the duration.

•     Target 2: maximise convexity with at least 4% portfolio yield (hint: use the approximation formula for convexity).

For each target, report the portfolio yield, duration, convexity, and allocation, and explain how these proposed allocations would benefit the asset management firm.

[Hint: see the method explained in the lectures on fixed income portfolio management and the related seminar.]

Note: If the solver does not find an optimised solution and you are certain to have correctly applied the constraints, please relax some of the assumptions and explain why (results these will be checked in the supporting Excel file). Please show the application of the solver in the supporting Excel file and explain this in your main report. It is not good practice to simply report the results.

Question 2 - Yield Curve and View on Interest Rates (compulsory) You are asked to advise the asset management firm about future interest rates and provide your view.

You need to form your view on future interest rates for the US Treasury yield curve for the 3 month, 6-month, 1-year and 2-year horizons from the settlement date and compare it to what the market and central banks expect. 

A. Explain your view, whether you agree or disagree with the expectations of central bankers and the market. Describe what macroeconomic factors and 

central banking decisions influence your view on interest rates and the observed expected shape of the US Treasury yield curve. 

[Hint: To form your view, please estimate and use a non-linear yield curve model of your choice (e.g., regression models, cubic interpolation, or NelsonSiegel model as covered in Topic 3). To gauge expectations of future interest rates, you could make use of the FOMC forecasts, policy reports, and common forward interest rate instruments traded in the market.]

B. Explain in words how you could use a plain vanilla interest rate swap to hedge or speculate based on your views on interest rates.

PLEASE ANSWER ONLY 2 OUT F 4 OF THE FOLLOWING QUESTIONS (NUMBER 3, 4, 5 AND 6)

Please do not answer more than 2 as I will mark the first two questions presented in the project report only.

 

Question 3 - Curve Trade with US Treasuries

Based on your view on expected interest rates over the next year and your macroeconomic analysis (question 2), you decide to investigate a strategy that profit from possible changes in the slope of the US Treasury yield curve, using the 10-year and the 2-year US Treasuries in your portfolios (buying or shorting the 10year bond while shorting or buying the 2-year bond), and propose this strategy to the  asset management firm and their fixed-income traders.

 

A.    Calculate the forward prices and yields of the two bonds for settlement on 28 October 2025. [Hint: Please source the relative refinancing rate using the Actual/360]. Could you explain if there is a profitable opportunity based on your view on interest rate? Could you explain your positions in the above bonds?

B.    Calculate the PV01 of both bonds. Please use the approximation formula when computing the modified duration and show your full working calculations. How would you structure the trading position per USD 10m of exposure in the 10-year bond? What type of risk are you hedging in this case?

C.    Assume that forward short-term interest rates are above the forward guidance rates provided by the Federal Reserve. Based on this observation, briefly discuss the risks to your chosen trading strategy. Explain how the dynamics of inflation could affect your trading strategy. 

 

Question 4 - Cash and Carry Strategy using German Bunds and Futures You are now proposing to the asset management firm a cash and carry strategy.  Consider a German government bond 10-year futures contract on a notional bond with a 6% coupon and 10-years to maturity (Annual, Actual/Actual) (e.g, Euro Bund Futures) with 6^th December 2024 delivery cycle [Please source the corresponding clear price of the Euro Bund Futures contract]. Assume you could deliver both German bunds of the portfolios you constructed in Question 1. [Hint: If you experience issues with the bunds originally selected, please choose two alternative bunds for this question so that these would be deliverable in the corresponding Euro-bund future contract for the corresponding delivery cycle, or change delivery cycle based on what it is traded in the market and explain your assumptions].

A.    Compute the conversion factors and gross basis of the two bonds.

B.    What is the implied repo rate of the two bunds? Please show all working computations and explain. Which bond you would choose for delivery between the two? Why? 

C.    What is the ‘net basis’ for the two bunds if the actual repo rate is 4.50 % per annum? Is this strategy profitable? Would you suggest this strategy to the asset management firm? Why or why not? 

Question 5 - Repos and Government Bonds Trading Strategies

You are suggesting the asset management firm traders using repo and reverse repos to devise trading strategies on US Treasuries in the portfolio of question 1. 

 

A. Please construct, show the calculations and explain the following strategies, assuming you are trading 10 million notional amount of US Treasuries for each strategy, with settlement date 28 October 2024:

• funding a long bond position for 7 days from the settlement date, and • covering a short bond position for 7 days from the settlement date.

B.    By observing the prices of the US Treasuries traded after 7 days from the settlement date, explain whether these strategies made a profit or loss. Explain whether your results are plausible with reference to your yield curve expectations of question 2 and the observed market prices.  Would you suggest these strategies to the asset management firm? Why or why not?

C.    Explain the main risks factors that may affect your repo rates and trading strategies, and how their impact might vary in normal times, during a financial crisis or because of exogenous shocks to the economy and the financial markets.

 

Question 6 – Plain Vanilla Corporate Bonds and Corporate Green Bonds

One of the clients of the asset management firm is considering the issuance of a possible plain vanilla corporate bond with the following features, and you are asked to conduct an analysis of the intended corporate bond. Assume an ideal 5year corporate bond paying a coupon of 6% (annual, 30/360) and repaying at par. Assume the swap zero-rate term structure is flat at 4.5%. 

A.    Calculate the expected cash flows, the ‘fair value’ price and yield of the bond if the default intensity is constant at 2.0% and the recovery rate in the event of default is 50%. Then, calculate the present value of the bond’s promised cash flows using risk-free discount rates. If the corporate bond is trading at its ‘fair value’ price, what is the expected loss given default? 

B.    Assume that the client is considering the issuance of a corporate green bond. The price of the green bond is 112.00, but Settlement, Maturity, Coupon Rate, Face Value, Frequency and Default Intensity are the same as for the 5year corporate bond described above. Calculate the yield to maturity of the green bond and compare it to the yield of the corporate bond computed in question 6, A. What factors might account for the spread between the yield to maturity of the plain vanilla corporate bond and the corporate green bond?

C.    Choose a 5-year US corporate bond observed in the market with settlement date of 28 October 2024. Compute the spread basis of the corporate bond

when comparing its yield with the yield of 5-year Treasury bond and the 5year US Dollar Swaps. What factors could explain this spread? Then, compare your example with the computations carried in part A and B. What could explain the difference in the yields computed in A and B with respect to the yield of the corporate bond observed in the market?

Other information, suggestions, and requirements 

Add the word count to the overall project (maximum 3,000 - this is a hard limit, with no buffer permitted). There is not a word count for each sub-question, but only for the overall project. You should clearly signpost responses by question and apply the style of a professional and clean report. In your answer to each subquestion, you could include snapshots from Excel to highlight your key computations. Please explain all working calculations. You can make use of figures or tables that best illustrates one or more of the key points you are discussing. Figures and tables can be taken from existing published material, in which case the source needs to be acknowledged in the figure/table legend or built by yourself with data you may obtain from Bloomberg, Eikon, Datastream, or other professional and reputable services. Tables’ and figures’ legends should not be included in the word count. You need to compute trading strategies in the Excel file and report them also in the World document report. The report should be selfcontained, so you need to explain how you source data, your assumptions, your calculations and the rationale of the strategies.

If you have queries concerning the project, you can contact us via email or during office hours. Please bear in mind that data collection is your responsibility and forms part of the assessment for your project.

3. What is required of me in this assessment?

Admin

As part of the assessment for this project you will need to submit:

1.An Excel spreadsheet with all your calculations. The spreadsheet should be tidy and easy to read. The Excel file should also include all the raw data indicated in the data section below. The data provider and data identifiers (i.e., Bloomberg, DataStream or Eikon securities codes) should be reported so that I can verify what you have done. In the spreadsheet, you should clearly explain what you are doing. You should label data/results and comment on your calculations. If you make assumptions about some data, please state them and explain your choices.

2. A report using a Word document with a separate answer to all the questions. The Word document should be self-contained so that the reader will not need to refer back to the Excel file. In other words, all the main results discussed in the Word document should be reported and summarised in it. Each answer should be clearly labelled with the number of the question or sub-question it refers to. The Word document should be professionally written in the form of a report.

By 28^th January 2025 at 12:00 pm you should submit, via Blackboard, the two documents above. You can do so by going to the “Assessment” folder of the module. Then select “individual project” and upload the files (you can find instructions on how to do this by clicking the "student support" tab and checking the material under "Submitting work online via the Blackboard Assignment tool"). The name of the student should be clearly indicated on all the documents. 

If you wish to change your submission, you can do so up until the deadline.

Self regulation: Make sure that you…

Manage your time properly and download the data as soon as possible considering the choice of the questions. You can revise and update your responses as the deadline is approaching if any relevant market updates should be included.

Three key pieces of advice based on the feedback given to the previous cohort who completed this assignment

1.  Don’t wait until last minute before the deadline.

2.  Work regularly on the project to make progress.

3.  Keep the submitted document tidy and clean.

Formatting Guidelines

1. The spread sheet should be tidy and easy to read. The Excel file should also include all the raw data indicated in the data section below. The data provider and data identifiers (i.e.,

ISIN/securities codes) should be reported so that I can verify what you have done. In the spreadsheet you should clearly explain what you are doing. You should label data/results and comment on your calculations. 

2. The Word document report should be self-contained so that the reader will not need to refer to the Excel file. In other words, all the main results discussed in the Word document should be reported and summarised in it. Each answer should be clearly labelled with the number of the question or sub-question it refers to.

Word limit/guidance and penalty applied

We will only consider the last submission received before the deadline. Late submissions will be penalised as per the following University rules:

- 10% of the total marks available for that piece of work will be deducted from the mark for each working day (or part thereof) following the deadline up to a total of five working days; where the piece of work is submitted more than five working days after the original deadline: a mark of zero will be recorded.

Referencing Style

Harvard style. 

Check the university guideline at 

https://libguides.reading.ac.uk/citing-references/writingcitations Harvard referencing style is recommended.

Guidance on Academic Misconduct (including using Turnitin practice area)

The work you produce must be your own. It must not have been submitted as part of other assessments, at this or another institution.

You should ensure that the work you produce adheres to the University’s statement on academic integrity and to the regulations regarding academic misconduct (such as plagiarism and cheating).   You can find information about this at:

http://www.reading.ac.uk/internal/exams/Policies/examisconduct.aspx  

4.The Marking Scheme (Marking criteria/rubric)

Please make reference to the rubric and marking criteria at the end of this document.

See marking weight by questions and sub-questions in Section 2 of the assignment brief.

5. What resources might I use to get started? 

Textbook, lecture notes, library, online resources, financial data provides at the ICMA Centre, together with the resources indicated in both the assignment brief and in the module documents.

6. Guidance regarding the use of AI tools

[Discuss whether students are permitted or not to use AI tools in preparation of their coursework] 

The use of AI tools: 
☒ Is prohibited for this assignment
☐ Is permitted for this assignment, provided that their use is properly acknowledged, in accordance with university guidelines

Note: the MISuse of Generative AI tools, including the failure to appropriately acknowledge the use of such tools, is considered Academic Misconduct and carries sanctions, as detailed in the Assessment Handbook.

Academic misconduct guidelines:

https://www.reading.ac.uk/cqsd/-/media/project/functions/cqsd/documents/qap/9-academicintegrity-and-academic-misconduct-final.pdf

Annex 1 related to the use of AI tools:

https://www.reading.ac.uk/cqsd/-/media/project/functions/cqsd/documents/qap/9a-gaitaiam.pdf

7. Late Submission Arrangements

Point of Submission :   Click or tap here to enter text.

Late Submission Penalty: 

☒ The University standard penalty apply

☐ Other:  Click or tap here to enter text.

Plagiarism:

☒   The University’s standard  policy on Academic Misconduct applies                   

☐   Other: Click or tap here to enter text.        

8. Feedback Arrangements      

Timing of feedback: ☒  Within 15 days of submission deadline    ☐ When examinations marks are released  ☐ Other  Click here to add text

Type of feedback: ☒Mark                                            ☐Generic Feedback ☐Individual Feedback                  ☒Comments written on the assessment ☐Audio Feedback                         ☐ Video Feedback ☒Breakdown of Mark                  ☐Other: Click or tap here to enter text.

Location of Feedback: ☒Blackboard                                     ☐Turnitin                           ☐ RISIS ☐Other:  Click or tap here to enter text.

Assessment Criteria Rubric for Marking

GRADE BANDS	FIRST CLASS		2:1	2:2	3RD (THRESHOLD)	FAIL
ASSESSMENT CRITERIA	80+ OUTSTANDING	70 – 79 EXCELLENT	60 – 69 VERY GOOD	50 – 59 GOOD	40 – 49 SATISFACTORY	39 AND BELOW
Criterion 1: Evidence of Knowledge and Technical Skills Project shows a high degree of data collection and data management skills, data analysis and ability to formulate and execute appropriate techniques in fixed income portfolio management and trading.	A highly precise and extremely clear approach to data management and data collection, well explained in the report. Excellent application executed and described with an exceptionally high degree of accuracy and detail. Knowledge and technical skills in bond and money markets go beyond what could have been expected.	Very precise and clear approach to data management and data collection, with appropriate explanations in the report. Appropriate fixed-income portfolio management and trading techniques, executed and described with high degree of accuracy and detail.  Knowledge and technical skills in bond and money markets fully meet expectations.	A precise and clear approach to data management and data collection, with appropriate explanations in the report and minor inaccuracies. Appropriate fixed income portfolio management and trading techniques, executed and described with some imprecisions.  Knowledge and technical skills in bond and money markets meet most of the expectations with some limitations.	Data collection and management shows some imprecision. Most fixed-income portfolio management and trading techniques have been correctly described and executed, with several minor mistakes in the applied procedures.  Knowledge and technical skills in bond and money markets meet only partially the expectations with some relevant limitations.	Data collection and management show significant shortcomings regarding the precision and detail of explanations in the report. Formulation and execution of fixedincome portfolio management and trading techniques demonstrate limited knowledge of underlying concepts and their application in bond and money markets. Expectations are only sufficiently met.	Data collection and management show extremely significant shortcomings regarding the precision and detail of explanations in the report. Formulation and execution of techniques demonstrate very limited knowledge of underlying concepts. Applications of concepts in bond and money markets are not appropriate. Overall expectations are not met.
Criterion 2: Interpretation and Implications of Results Discussion of findings demonstrates a deep understanding of bond and money markets, draws implications from the findings and highlights limitations and plausiblity of the approach and/or its results.	Extremely wellexplained results. Their interpretation demonstrates an exceptional understanding of techniques and macroeconomic/financi al context. The implications of the findings are correct. Limitations of approaches and plausibility of results are very clearly	Well-explained results. Their interpretation demonstrates a very good understanding of fixed-income portfolio management, trading techniques, and macroeconomic/financi al context. Several implications of the findings are correct. The limitations, approaches, and plausibility of results are clearly	Well-explained results with minor imprecisions. The interpretation of findings demonstrates a good understanding of fixed-income portfolio management, trading techniques and macroeconomic/financi al context. Implications of findings are correct with minor imprecisions. Some limitations, approaches,	The explanation of results shows few good attempts, with several imprecisions and some superficial or incorrect explanations. Partial understanding of macroeconomic/financi al context. Implications of findings are only partially correct. Limitations, approaches, and plausibility of results are often only partially	Discussion of results shows some lack of understanding.  Fixedincome portfolio management techniques and trading strategies are often not appropriately described and executed. The macroeconomic and financial context is not clearly understood and explained. Implications of findings are often incorrect or irrelevant.	Discussion of results is missing or shows severe lack of understanding.  Techniques are not appropriately understood and executed. Macroeconomic and financial context is discussed superficially or missing. Implications of findings are incorrect or missing. Limitations, approaches, and plausibility of results

	discussed. Overall exceptional ability in reasoning.	discussed. Overall high reasoning ability.	and plausibility of results are appropriately discussed.	discussed or are incorrect.	Limitations, approaches and plausibility of results are often only superficially discussed, incorrect or missing.	are incorrect or not discussed.
Criterion 3: Independent Research  Reflect a deep understanding of the module content in bond and money markets, macroeconomic information, market information, and relevant central bank policies and decisions. Relate the findings to the above sources to support the analysis and the main results, and derive relevant implications.	A vast and excellent variety of sources highly relevant to the questions is used. Exceptionally high understanding of key information which demonstrates a highly critical approach. Comparisons between sources and own findings are extremely appropriate and insightful.	Uses a good range of sources which are highly relevant to the question tasks. Shows a high understanding of key information in the field. Reflects an overall critical approach. Comparisons between sources and own findings are appropriate, with some good insights.	Uses a reasonable number of sources, with few imprecisions. A sufficient understanding of key information with minor shortcomings is shown. Several comparisons between sources and own findings, with minor imprecisions and few insightful conclusions.	Engagement with sources is limited and could have been more extensive. Some cited sources and not relevant to the question tasks. Key information from sources is not understood with several inaccuracies. Comparisons between sources and own findings may occasionally be superficial and/or could be more explicit.	Very limited discussion of information in sources. Superficial discussion which contains imprecisions and significant inaccuracies. Comparisons between information from sources and own findings are often incorrect or/and lack depth.	Low engagement with sources or missing discussion. Missing or very few links between  findings and key information from sources, with several inaccuracies. Comparisons are incorrect.
Criterion 4: Presentation, Structure and Style Show a clear and logical structure, a high standard of presentation, good use of tables, Excel and graphs, and include substantive referencing in the Harvard referencing style.	Extremely well organised. Structure of responses and evidence fully supports line of arguments or main implications. Very fluent and appropriate style. Tables and graphs are very well-designed, illustrate the main findings and results, and are easily readable. In-text references and reference list are consistent and conform to recommended conventions. Conforms to word limit.	Well organised. Structure of responses and evidence supports line of arguments or main implications. Fluent and appropriate style. Tables and graphs are well-designed, illustrate the main findings and results and are clear. In-text references and reference list are almost always consistent and conform to recommended conventions. Conforms to word limit.	Good organisation and coherent structure, with few inconsistencies. Clear style fluent with few imprecisions. Tables and graphs are generally well-designed and easily understood, but could highlight more clearly the core results. Minor deviations from referencing and citation conventions. Conforms to word limit.	Appropriate structure and organisation but occasionally not coherent. Fluent style wit some imprecisions. Tables and graphs occasionally lack clarity or are not welldesigned.  In-text references and reference list may not fully conform to conventions. May deviate from word limit.	Organisation and structure is sufficient but often not coherent. Several typographical and grammatical errors interfere sometimes with meaning. Tables/ graphs are difficult to read.  In-text references and reference list may be inconsistent and/or not conform to conventions. May deviate from word limit.	No structure and coherent organisation. Several typographical and grammatical errors that interfere with meaning. Tables and graphs are non-existent, not readable and not appropriate. In-text referencing and reference list is inadequate and does not conform to conventions. May deviate from word limit.

Good luck with  your project!