Singapore Airlines Bond Analysis - Research Paper Example

Singapore Airlines Bond Analysis Student’s Name Institutional Affiliation Introduction Nowadays, investors are fairly much informed in matters related to investment so that they prefer to have their portfolios well spread out. investors makes sure that their respective portfolios cover a wide array of investment options as a way of diversifying potential risks involved with the activity (Jones & Wilson, 2004). The stock options are mostly made up of two well-known investment options; stocks and bonds, which in fact are the most predominant items within a given securities market at any given moment in time. Most of these investments options, particularly stock options are affected by both the internal and external activities of a given firm. Internal activities might range from the poor leadership styles that are likely to affect operations or even when employees are not productive as a result of other factors like poor pay (Jones & Wilson, 2004). External influences results from factors that affect a given securities market in a way that cannot be controlled or supervised hence lowering productivity levels. A perfect example might be ruined public perception of a given company as a result of poor service delivery or even resulting from companies engaging in dubious and irresponsible activities (Jones & Wilson, 2004). Both of these factors have an imminent influence on the activities of a given firm that in turn affects its securities prowess especially the stock options, which become more risky to trade but has a higher chance of rewarding investors with more returns depending with the market conditions. On the contrast, however, bonds make a better preference for most investors that would opt to invest in less risky affairs but with fixed returns. This research paper tackles the analysis of bonds as disclosed by three institutions, the Singapore Airlines, the Vanguard returns and also, the Treasury returns and find out their overall portfolio standard deviation for the purpose of evaluating their immediate performance capacities while also trying to figure out their riskiness levels. Singapore Airlines: Historical Analysis Singapore Airlines is Singapore’s national carrier that has its headquarters in Changi Airport. It was established in 1947 but commenced initial operations in 1972 as Malayan Airways (Singapore Airlines, 2015). The carrier is made up of numerous airline-based subsidiaries that include; SIA Engineering Co. that is focused on activities related to maintenance, aircraft repair and overhaul business operations in more than nine countries; Singapore Airlines Cargo, which is focused on operating SIA’s freighter fleet while at the same time ensures to oversee operations regarding cargo-hold in aircrafts owned by the company; SilkAir, which operates mostly regional fleets to secondary cities and, also operates other fleets like Scoot and Tiger Air, which are mostly operating low-cost carrier industries (Singapore Airlines, 2015). Singapore Airlines is the world’s second largest operational airline in relation to market capitalization. It is operated under a very distinctive company slogan “A Great Way to Fly” with more than 64 international destinations that are served with at least 110 fleet sizes (Singapore Airlines, 2015). The company’s majority shareholder is Temasek Holdings that enjoys a 56% shareholder stake. The Airlines current CEO is Goh Choon Phong and has more than 23,000 employees as par 2014/2015 financial year statistics (Singapore Airlines, 2015). Vanguard Total Bond Market Vanguard is a fairly known international bond market mutual fund that has a significant number of bond placements in comparison to other notable platforms. The platform is distinctive in nature given that it is focused on investments related to a broader array as well as market-weighted bond indexes given that it incorporates a good range of income securities like the corporate, government-based and global-related bonds. Consequently, it is important to note that within this platform the immediate selection of the mutual funds investments to partake rests with sampling procedures while at the same time VBMFX plays a role of an asset-base that is applied on a given set of long term investments in order to rule out on the possibility of engaging in low-cost bond holdings. Notably, it is noted that investors will usually make efforts to include bond options within the respective portfolios as a way of minimizing potential risks that might arise from unfavourable and uncertain conditions facing the stock options. They are also a less risky affair since the level of returns is known and fixed while payment period is also well-established and expected by the involved investors and placing firms. Objectives of the Study The notable objective of this paper rests with computing the overall portfolio standard deviation for the three placements; Singapore, Vanguard and Treasury platforms and determine whether it is risky or not for potential investors to put their cash resources in form of investments. It is important to comprehend that the analysis of these three bond platforms is related to finding their risk significance while still ensuring to maintain an equal measure of weighting of 0.5 for easier and concise comparison purposes. Methodology The research analysis paper adopts a descriptive research design. A descriptive research design has been embraced because of its simplicity in presenting research findings while at the same; it is a perfect technique since it eliminates possibilities of bias while analyzing sample data provided. The sample data under analysis has been sourced from different platforms that include; Vanguard Website, and Yahoo Finance and later, the data has been subjected to intensive Ms Excel computational functions like standard deviation, averages and even covariance among others. Review Wander and D'Vari (2003) notes that the standard deviation of investment option returns is the most popular form of widely accepted and the commonly applied indictor of portfolio risk in the investment management operations. Despite its common application, the authors indicates that the results from this indicator can at times be misleading and provide inaccurate conclusions especially when it is focused on fixed-income portfolios. The article notes that the standard deviation of all historical-based returns do not necessarily show the true and fair existing portfolio risk except in cases where portfolio risk is deemed to be indicative and reflective of a complete set of possible end results that will likely happen in a near future (Wander and D'Vari, 2003). They further note that the underlying statistical significance of a historical standard deviation of expected returns can only be said to be crucial in case significant data points are established in order to eliminate possibility of dramatic alterations that emanate from minor data changes. The article also notes that the true existing distribution of investment expected returns cannot be normally distributed and this can result to standard deviation resulting to incorrect approximations of the likelihood of extreme cases (Wander and D'Vari, 2003). Nunn Jr, Hill, and Schneeweis (1986) notes that exchange platforms portrays odd-lot activities of each potential investor and thus, accounts for only an insignificant section of the entire trading within the listed placements. On the contrast, the authors indicate that a significant portion of the listed corporate trading happens over-the-counter and it mainly constitutes round-lot trades amongst different entities (Nunn Jr, Hill, &Schneeweis, 1986). For this reason, the possible differences that results from market attributes lead to the odd-lot exchange prices being different from all present within a round-lot institutional market platform. The article finds that Institutional-based bond process is in most cases greater in comparison to those offered in exchange platforms (Nunn Jr, Hill, &Schneeweis, 1986). Notably, bond returns from institutions are perceived to be yielding significant amounts of higher beta, R2 estimates as well as possess a lowly-placed standard deviation as well as residual risk estimates (Nunn Jr, Hill, &Schneeweis, 1986). Gesuer and Hakansson (1987) argue that the gains resulting from non-inclusion of US-based assets from a portfolio were indeed significantly high especially in cases of highly risk averse approaches. The authors also found out that the gains that resulted from eliminating the absent leverage limitations were greater in comparison to when they were of non-US based securities nature (Gesuer & Hakansson, 1987). They finally found out that there was a stronger level of evidence of activies related to market segmentation so that the optimal degrees of investment within the US-based securities were in most cases apportions a zero range in the presence of non-US asset categories (Gesuer & Hakansson,1987). Jostova, Nikolova, Philipov and Stahel (2013) notes that although both equity and bond momentum are fairly driven by aspects related to NIG entities, bond momentums specifically are not a mere manifestation of equity momentum. In essence, the authors note that only a low portion of public-firm bonds momentum profits are related to an entity’s equity momentum and, there is always an insignificant level of overlap that exists between entities that are categorized in terms of equity and bond momentums (Jostova et al, 2013). It is clear that the public-firm bond momentum is in more cases highly correlated with private-firm bond momentum as opposed to equity momentum. It is further established that trading infringements are not fairly positioned to expound on the persistence of bond momentum. In fact, momentum is deemed to be profitable in both quote and trade-focused data while there are higher credit risk bonds that will mostly trade even more in substantial trade sizes and at a relatively lower cost. Bond momentum, as these authors note, are deemed to be more robust to alteration for bond-level interest rate risk, credit risk and microstructure change as well as equity and bond systemic risks. Jones and Wilson (2004) applies geometric means and standard deviation approach to determine the nominal and inflation-adjusted monthly expected returns for an overlapping period of 5 years as well as the annual returns ranging in a span of 25 years or so documenting both stock and bond volatility. The authors found out that the immediate change in the volatility of stocks and that of bonds have continued to increase in the past few decades or so hence improving the importance of stock options in asset allocation processess (Jones & Wilson, 2004). They further note that the aforementioned volatility changes are even more significant in cases of increased inflation levels. Research Findings The procedure presented below was embraced for the purpose of determining the portfolio standard deviation. The first process involved the computation of expected returns and also the standard deviation as portrayed in the Table A below. Table A Standard Deviation SIA 0.00215 VBMFX 0.00039 Treasury 0.00874 Table A above portrays the standard deviation for the three platforms; 0.00215 represents the standard deviation for Singapore Airlines; 0.00039 represents that of VBMFX; and 0.00874 represents that of Treasury returns. The next step involves the evaluation of correlation for three platforms of a -0.000001 by use of a correlation matrix as portrayed in Table B below; Table B The final step involves the computation of the total portfolio standard deviation by use of the function / formula below; =SQR 0.52*0.002152+0.52*0.52+2*0.5*0.5-0.000001 SQR (0.0000046+0.0625+0.499) SQR (0.562) 0.75 The computational findings above indicates that the overall standard deviation is less than 1 hence, it is safe for investors to go forward and make investments with the bonds of Singapore Airlines. Conclusion To sum up the discussion above, it can be noted that the process of evaluating the form of bond to invest in mostly entails the computation of portfolio standard deviation for a given set of bond sample accessed from different bond platforms. From the case analysis at hand, it can be seen that Singapore Airlines bonds have a bond of 0.75, which is somehow below 1 hence a good indication that investors might go ahead and include the bond in their portfolios since it attracts less risk level. References Jostova, G., Nikolova, S., Philipov, A., & Stahel, C. W. (2013). Momentum in Corporate Bond Returns. Review of Financial Studies, 26(7), 1649-1693. Jones, C. P., & Wilson, J. W. (2004). The Changing Nature of Stock and Bond Volatility. Financial Analysts Journal, 60(1), 100-113. Nunn Jr., K. P., Hill, J., & Schneeweis, T. (1986). Corporate Bond Price Data Sources and Return/Risk Measurement. Journal of Financial & Quantitative Analysis, 21(2), 197-208. Singapore Airlines (2015). The Singapore Airline Story. Retrieved on January 6, 2015 from http://www.singaporeair.com/en_UK/about-us/sia-history/ Wander, B., & D'Vari, R. (2003). The Limitations of Standard Deviation as a Measure of Bond Portfolio Risk. Journal of Wealth Management, 6(3), 35-38. Read More