Significant Relationship among the Interest Rate and Bond Valuation - Assignment Example

Section Finance and accounts are two different fields but people always try to identify both of them as a same. Accounting has been referred to recording the financial transactions while finance is the name of using the funds of the company at a place from where the likelihood of earning would be on a higher side. Apart from this particular function of the finance department, there is another function use to analyze the financial position of the company and take effective decisions pertain to the loopholes of the company. There are number of concepts that come under the ambit of financial management, and among them, the name of bonds and its valuation is one of them, in fact it is quite important as well. Theoretically, a bond is like a stock or a share which gives a sort of dividend to its holder. It is one of the most important categorizes that comes under the ambit of finance and it is important from the viewpoint of financial consultant to analyze the same (Bodie, Zvi, Alex Kane, and Alan, pp. 44-55). There is a significant relationship has been found among the interest rate and bond valuation. A rate at which the interest is paid by the borrowers in consequences of using the money specifically borrows from a lender. Interest rate in particular is a percent of principal paid by a certain amount per annum. Interest rate is one of the most important from the standpoint of a country and it is also deems a positive and significant tool come under the ambit of monetary policy. Countries with a high interest rate would not be deemed as economically viable because the cost of doing business in these countries would be high. Interest rate has its own recognition for the companies, especially for the new companies who want to enter in a new country. There are number of countries which decreased its key policy rate merely to increase the level of borrowing in the economy which may increased the financial and economic potential of the economy as a whole. There are number of methods to value a bond and it is essential to value it accordingly, in order to increase the recognition. Bonds depend heavily upon yields, interest rates and maturity provisions. The main perspective of this assignment is to answer some of the questions related to bond analysis and valuation. There are four different tasks which have been required for the same analysis. The dynamics of funds with respect to the changes in time has been linked to the advancements or the trends registered in the contemporary world. The preference of each model against another has been pegged on the associated risks and the profitability that may be developed from the option of preference. The distinction of one model of funds to another can be presented via the evaluation of the procedures or methodologies that are deployed through the realization of the eventual aims. Other contributory factors that assist in the evaluation of the advancements made by a model of preference can be sourced from the governing principles in terms of contribution and subscription. Mutual funds focus on pooling together risks in terms of investment. Small investors pool their monetary value under one basket, thus aligning themselves for a strengthened investment. The caption point that is routinely developed via this approach is the fact that the investment is modeled along with an intelligent platform (Kent, Mark, Russ and Sheridan, pp. 15-20). The flow of monetary investments under mutual funds has posted significant adjustments across the twenty year period. A reflection on the annular performance of a mutual fund based investor, such as Cohen & Steers Realty Shares (CSRSX), reflects the indicated trend. This organization has been posting mixed adjustments in its annular revenue overview. The flutualtion of mutual funds in the analysis could be analyzed here with the below mentioned table and chart,   Mutual Funds Close End Funds ETFs UIT Total 1995 2,811 143 1 73 3,028 1996 3,526 147 2 72 3,747 1997 4,468 152 7 85 4,712 1998 5,525 156 16 94 5,791 1999 6,846 147 34 92 7,119 2000 6,965 143 66 74 7,248 2001 6,975 141 83 49 7,248 2002 6,383 159 102 36 6,680 2003 7,402 214 151 36 7,803 2004 8,095 254 228 37 8,614 2005 8,891 276 301 41 9,509 2006 10,398 297 423 50 11,168 2007 12,001 312 608 53 12,974 2008 9,604 183 531 29 10,347 2009 11,120 220 777 38 12,155 2010 11,821 234 992 51 13,098 2011 11,622 239 1,048 60 12,969 Average 7,909 201 316 57 8,483 From the analysis it is found that mutual funds have been increasing with reaosonable percentages year on year (YOY). It increased by 25.4% in the fiscal year 1996, and then increased consecutively for 6 years or so. Close end funds and ETFs have also increased with a reasonable percentages from 1996 to 2011. It is a good sign for the economies as a whole. The average mutual fund companies are, 7,909, while the average amount of close end funds, ETF and UIT are 201, 316 and 57 respectively. Thetotal mutual fund industry is 8483 billion US$ in average. A reflection of yet another brilliant model of funds may point on the pension fund. These funds are, mainly, placed by the employers as an effort to secure the future of their employees upon termination of the working period or retirement. Various advancements have been registered against the preference of this model of funds. This is mainly oriented along the developments in economic ambitions. Year Mutual funds Closed-end funds ETFs2 UITS Total 1995 5,761 499 2 12,979 19,241 1996 6,293 496 19 11,764 18,572 1997 6,778 489 19 11,593 18,876 1998 7,489 491 29 10,966 18,975 1999 8,003 511 30 10,414 18,958 2000 8,370 481 80 10,072 19,003 2001 8,518 491 102 9,295 18,406 2002 8,511 544 113 8,303 17,471 2003 8,426 583 119 7,233 16,361 2004 8,415 618 152 6,499 15,684 2005 8,449 634 204 6,019 15,306 2006 8,721 646 359 5,907 15,633 2007 8,746 663 629 6,030 16,068 2008 8,880 642 743 5,984 16,249 2009 8,612 627 820 6,049 16,108 2010 8,540 624 950 5,970 16,085 2011 8,684 634 1,166 6,022 16,506 Average 8,070 569 326 8,300 17,265 From the above computation, it is revealed that the total size of mutual funds from 1995 to 2011 amounting to US $293,502 billion. It has all types of mututal funds like closed end funds, ETFS and UIT as well. Mutual funds in this particular scemario is also increasing as compared to its movment in last years. The average movement of the mutual funds is 8,070, while it is 569, 326 and 8300 for close end funds, ETF and UIT respectively. World economies have progressed to promote the increase in self employment avenues, visualization of this model as the only viable option for economic growth. Different countries of the world experiencing different things in total. Different countries of the world, have different provision of movement in the bonds, The provision of United Kingdom is mentioned below, Likewise UK, significant change in the pension funds could be analyzed in Germany as well and the graph of the same is mentioned below, However, a study in the trends exhibited by this vehicle of investment has been indicating mixed results in terms of performance. There seems to be reduced instances of increase along the twenty (20) years period. There have been significant drops in profitability, a development that has been linked to the increased assert liquidation. In the case of Global Macro, the statistics presented during the year 1999, 2000, 2004, 2008 and 2009 have indicated significant drops in net asserts. However, the events that lapses after such a period indicates increase in the assert accumulation. This trend may be explained by the incorporation of managerial concepts, as well as the events at the global stage. A manager in charge with the dispensation of the investments under Hedge funds may opt to initiate constrains, such as GATEs, in effort to ensure that the increased liquidation is restricted. On the other hand, the declines in assert volumes may be associated to major events trending on the global arena; such as change in government regimes, financial meltdown and terrorism attacks, amongst others. Hedge fund could also be analyzed with the help of the provided data. Year $ Billions Growth 1993 832   1994 1023 22.96 1995 1199 17.20 1996 1425 18.85 1997 $118.23 -91.70 1998 $143.10 21.04 1999 $188.90 32.01 2000 $236.61 25.26 2001 $321.92 36.06 2002 $505.45 57.01 2003 $825.64 63.35 2004 $1,228.96 48.85 2005 $1,360.71 10.72 2006 $1,713.10 25.90 2007 $2,136.83 24.73 2008 $1,457.90 -31.77 2009 $1,554.10 6.60 2010 $1,693.90 9.00 1st Qtr 2011 $1,843.72 8.84 2nd Qtr 2011 $1,864.65 1.14 3rd Qtr 2011 $1,716.98 -7.92 4th Qtr 2011 $1,710.02 -0.41 1st Qtr 2012 $1,772.30 3.64 2nd Qtr 2012 $1,784.34 0.68 3rd Qtr 2012 $1,827.30 2.41 4th Qtr 2012 $1,798.70 -1.56515077 Average $1,242 $12 Lots of fluctuation has been envisaged in the analysis of the country as far as Hedge fund is concernd. The average hedge fund industry value is $1,242 billion while the averega growth occurred in this industry from 1993t till 2013 is 12%, which is quite higher indeed. The duration of expedition is the key determinant of the model of investment to be ordained under treasury based options. A wise financial bases his or her desire to invest on the amount of returns that are anticipated to be reaped from the model of preference. Various factors are utilized in the quantification of the appropriate channel to embrace during the determination of the preference option of choice. The limiting factor that attributed to this model of preference in terms of investment. In addition, the contribution of other annexed but essential factors will formulate essential grounds upon which to base the investment decision. This will be based on the aspects such as the as the period of maturity. Investments that can be described as BULLETs based implies that the anticipated investment will only be based the model of investment preferred by the investor. BULLETs simply imply that the investment is either fully short term based or wholly long term based. Investment on this model of approach may be verified by the involvement of the comprehensive evaluation of the desires that are attributed to the investment funds. For example, T-bonds are normally associated with a lengthened maturity period. This implies that their preference as the model of choice under BULLET based investment will be evaluated by the desire of the funds. For example, managers associated with pension funds may opt to place their funds on this channel of investment (Nguema 78). On the other hand, investments coined on the T-bills can be described as the short term based investments where the investors seek to redeem profitable supplement to their investments, or simply as returns. The beauty of investing in treasury based investments is the ascertained returns that are associated to the units. This is further amplified by the evaluation of the risks involved. On that note, it is wise to evaluate other factors that are attributed to this model of investment. Part-2 This is incorporated by the involvement of excellent balancing skills in terms of the returns anticipated by the T-bonds, and a comparison of the effective investments that are desired to be initiated in terms of T-bills. This can be described as a respond in terms of ensuring a continuous flow of returns in a treasury based investment. Scenario Analysis: Treasury Bond Manager Suppose a Treasury Bill has a rate of 4.5% Treaury Note = 5.5% If 100,000$ would be invested in both of the things then a proper allocation of funds is required Bullet: For a short term return, All of the money could be invested in the treasury notes because it has a higher rate of return but the slope of the same would also high because of high maturity. On the other hand, treasury bill has a return of 4.5% and has a shorter maturity but the association of beta is in the higher range too. (50%) * (4.5%) + (50%)*(5%) = 2.25 + 2.5 = 4.75% of the return could be get and it will decrease the leve of risk as well after making a portfolio. Barbell: Barbell strategy needs to allocated funds in both short and long term t-bill combination. From the above consideration, long term t-bill’s return rate is 5% while it is 4.5% for short term t-bill. 70% of the investment would be allocated to long term t-bill. The computation is mentioned below: (30%) * (4.5%) + (70%)*(5%) = 1.35% + 3.5% = 4.85% Barbell strategy is yielding higher return as compare to bullet strategy.  Ladder: Ladder strategy will yield the same result as barbell because it depends upon maturities of tragedy bills. Levels and Slopes: Levels and slopes are two most important factors that comes under the umbrella of bond valuation. Levels analyse the maturity of t-bills and treasury notes while slopes analyse the risk associated with each investment. The factors of “selectivity” and “timing” should be taken into consideration to examine the effectiveness of an investment as a whole. Both of these factors have been used in above mention computation of bullet, barbell and ladder strategies. Work Cited Bodie, Zvi, Alex Kane, and Alan J. Marcus. Investments. Boston, Mass. McGraw-Hill Irwin, 2005. Kent Daniel, Mark Grinblatt, Russ Wermers, Sheridan Titman. Measuring Mutual Fund Performance with Characteristic-Based Benchmarks. Journal of Finance, 1997. Read More