Notes for Report 2 FINM2001, 2025 S1
On eTB GSBG33
Below is a graph of monthly returns. If you take the average, you will find a negative monthly return.
So why is this happening? The recent five
years have been economically (and
socially) turbulent, and the RBA's policy
has responded to the economic
environment. The first phase was lowering
the RBA cash rate during the pandemic,
which was as low as 0.10% p.a. The second
phase was after 2022 when the RBA
started drastically raising its cash rates.
In particular, the second phase should
have drastically reduced bond prices. This
is obvious because bond prices and
interest rates (i.e., discount rates) correlate
negatively. This must have contributed to the
negative returns computed based on prices.
As we try to find one-month holding period returns
of risk-free bonds, we are using the prices of eTB
GSBG33. Is this the best instrument to use? Not
really, as this is a long-term bond. Prices are more
volatile than those of short-term bonds. Also, this is
not a zero-coupon bond but a coupon bond.
However, prices are easy to obtain since this bond
has been relatively well-traded for more than 5
years on the ASX. (While there are eTBs with
shorter maturities, which is better for our purpose,
trading seems thin, and continuous price data is
unavailable.)
Given the above constraints and the negative
returns, are there any ways to mitigate the
limitations?
Here is a method suggested by one classmate (thanks, Zac, from 2023S2).
(P(t+1)+Coupon)/P(t) where Coupon is 4.5%/12 = 0.375%, multiplied with a 100.
The method assumes that you receive coupons monthly, which differs from how coupons are paid
semi-annually. Given the constraints on the data availability you occasionally face in the real world,
these are approximations.
(To enrich your discussion, you may also read the market risk premium survey and the HBR article on
the cost of capital.)
-10.00%
-5.00%
0.00%
5.00%
10.00%
eTB Monthly Returns

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