Question 1
a) Discuss the process through which the Australian Federal Government issues debt securities to the market.
In your answer, discuss the bidding process and what determines the yield at which treasury securities are
issued.
b) The Burning Cash company raised $1m through a 10-year bond issue on the 31st of December 2019. The
bond pays 5% pa in coupons, with coupons paid quarterly. Calculate the price of the bond on the 8th of June
2021, given a market yield of 4.5%. In your answer, identify whether the bond is trading at a discount or a
premium, and explain the logic why this is the case. Show all calculations.
[3+7] = 10 marks
Question 2
a) Deakin Hedge Fund has a substantial position in Tenca shares. The share price has been volatile over the
past 6 months, and a group of equity analysts working in the fund believe that the price may drop substantially
over the next 4 months before recovering. Suggest two risk minimization strategies that Deakin Hedge Fund
can be adopted. In your answer explain the derivative product that would be used, the position taken, and the
cash flows at maturity.
b) A company requires funding for a new factory. The company only has access to a debt facility that offers
floating rate loans. However, given that the company is concerned about interest rates potentially rising in the
future, it prefers a fixed rate loan. Provide advice to the company on its options.
[4+2] = 6 marks
Question 3
Explain the rationale behind capital adequacy requirements underpinning the Basel III accord. What is their
purpose, and how do they restrict the operations of banks. In yo