London School of Business & Finance (LSBF)

MSc Finance and Investments

Module

Equity and Fixed Income Investment

Assignment Title

Written Coursework Assignment (100%)

Assignment Type Individual Assignment

Word Limit 3,500 (+500 words max allowed)

Weighting 100%

Student Cohort

Issue Date 13th April 2015

Submission Date 18th May 2015

Feedback Date

Issued by (Assessor)

Dr Binam Ghimire

Internal Verifier George Danquah

Plagiarism When submitting work for assessment, students should be aware of the LSBF guidance and regulations in concerning plagiarism. All submissions should be your

own, original work.

You must submit an electronic copy of your work. Your submission will be

electronically checked.

Harvard

Referencing

The Harvard Referencing System must be used. The Wikipedia website must not

be referenced in your work.

Learning Outcomes

On successful completion of the module, students should be able to: On successful completion of the module, students should be able to:

1. Analyse and apply concepts and techniques to the valuation of equity and fixed income investment

2. Be able to apply models derived from fundamental analysis to valuing equity and cash flow approach to valuing fixed income investments

3. Identify and critically appraise the impact of the current global financial environment on equity valuation

4. Perform appropriate valuation analysis of private companies and identify and critically evaluate the relevance of issues in valuing private and public companies

5. Critically assess the use of fixed income securities in the investment process

Grading Criteria Grading criteria is available at the end of this document.

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Assignment

Q 1 35%

The private equity firm has asked you to price a 5 year GBP bullet bond issue for them, with Price and Yield to Maturity, which might be issued in order to finance the leveraged buyout.

You have the following set of zero coupon rates from UK Treasury bonds, a Z-spread for United Utilities Group PLC of 200 bps over UK Treasuries and a coupon rate of 5% would be appropriate to attract

investors.

You can assume that coupon payments are annual and that you are pricing on a coupon day (no accrued interest) and you may ignore

basis conventions.

You should make your process and methodology clear with explanations at each stage.

(hint: You might find it easier to use the PV and RATE functions in Excel)

(35 Marks)

Zero coupon rate

1 Year 0.43%

2 Year 0.44%

3 Year 0.70%

4 Year 0.80%

5 Year 0.95%

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Q2 50%

Tangential is a AA+ rated company that is looking to issue bonds with a five year maturity. Their investment bank adviser has suggested that they issue a Yen 1 billion high coupon bond which will be an attractive investment for Japanese pension funds which must pay their pension obligations from income. The investment bank has suggested that a high coupon and redemption price of 90% of the face value will be a suitable bond structure. The following information is relevant. The current average yield on a AA+ bond is 5.7%. The maximum coupon payment could be 8%.

a) Show the possible cash flows for the bond and estimate the

issue price. You can assume there are no issue costs. (20

marks)

b) Explain and analyse what the investment bank adviser means

if he says that such a bond will allow the investor to convert

capital to income (10 marks)

c) Discuss any significant disadvantages that you would expect in

issuing a high coupon bond (10 marks)

d) If Tangential wishes to pay US dollars and not Japanese Yen,

what can the company do? Illustrate and analyse your answer

with diagrams showing the cash flows (10 marks)

Q 3- 15%

Discuss and critically evaluate three different theories relating to

the term structure of interest rates (15 marks)

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Guidelines Please read all questions and information provided carefully. Answer should be

made in appropriate length keeping in view the requirement of each question and total word counts allowed.

In addition, your assignment should demonstrate the following qualities:

A critical appreciation of relevant literature and its use to support argument,

substantiate calculations and other aspects of the assignment.

Taking ownership of the content, being prepared to debate and argue a personal

position, and providing evidence of evaluative skills. A submission made up of

extracts from published sources which is descriptive or simply just theoretical

regurgitation is not acceptable. Your submission must have interpretation and

consideration of the challenges and issues of taking theory into practice.

Logical flow of ideas and treatment; appropriate selection of real world factors related to the companies under scrutiny.

Evidence of additional personal research, and the ability to analyse material from a

variety of appropriate relevant perspectives.

Presentation, structure, appropriateness of methodology, breaking into section

headings/subheadings, tidiness.

Marks will be awarded for proper referencing and originality of work. Also note that

plagiarism is a serious offence and your submission will be electronically checked.

Your report must be handed in electronically no later than given date of submission.

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Grading Criteria

Criteria 70%-100% 60-69% 50-59% 0 to 49% Fail

Generic skills: communication and

presentation.

Comprehensive and correctly structured assessment. Style of writing is very fluent and develops a coherent and logical argument. Excellent referencing.

Well structured report which follows appropriate format but some aspects of layout and referencing could be improved. Style of writing is fairly fluent. Good referencing.

Good report in most aspects but suffers from variations in quality and the layout contains some inadequacies. Style of writing is satisfactory. Referencing needs improving.

Very poor report which is incorrectly structured and contains major errors and omissions. Style of writing lacks coherence and fluency. Poor referencing.

Knowledge & Understanding

Demonstrates excellent knowledge of theory and provides critical theoretical underpinning. Very good interpretations and summarising of main themes.

Wide range of knowledge demonstrated and evidence of good understanding of the topic. Ability to interpret and summarise succinctly.

Good range of knowledge demonstrated but weaknesses in key areas. Some understanding displayed of the topic. Summary and interpretation are satisfactory.

Very poor range of knowledge demonstrated and there are major weaknesses evident in interpretation and understanding. No clear interpretation of main themes.

Analysis

Excellent use of theoretical and conceptual models to guide analysis linked with a critical discussion of main themes. Deconstructs the major themes used in the argument.

Very good use of the theoretical and conceptual models with good critical discussion and application. Good evidence of deconstruction.

Use of theory and concepts limited but relevant. Application could be improved and there is a tendency towards description. Must provide more evidence of deconstruction.

Very poor use of theory and very little application of concepts. Very little description with not much evidence of analysis.

Synthesis/ Creativity/ Application

Logical presentation of themes with appropriate examples being demonstrated. Very good demonstration of synthesis. Models have been clearly applied to the argument.

Very good account of main themes with sound application. Good attempt at applying models to the argument. .Fairly good attempt at synthesising the salient points.

Good account of main themes with some attempt at application. Limited evidence of synthesis.

Very poor account of main themes with little or no application. No links between models and argument.

Evaluation

Shows clear evidence of in-depth critical reflection and evaluation of the argument by providing a robust defence of the opinions presented in the assessment.

Shows evidence of critical reflection and evaluation and a fairly cohesive defence of the argument

Shows some evidence of critical reflection but could have been developed.

Shows little or no evidence of critical reflection and needs to be much more developed. There is no defence of the opinions presented.