MA930 Investment Analysis and Portfolio Management
December 2014 Assessment
a) Summary of assumptions on the outlook for the UK economy and government policy.
• GDP is forecasted to be between 3.0%-4.0% in 2015. This is supported by the revision of the GDP in 2014 from 2.5% to 3.0% by Office for Budget Responsibility(OBR) in the Autumn Statement. (Office for Budget Responsibility, 2014). This is also supported by the reduction in unemployment rate by 7.2% in the fourth quarter which would increase consumption. (Office for Budget Responsibility, 2014).
• Inflation is expected to rise to between 2.0%-3.0% in 2015. This is supported by the outlook made by PWC in which it assumes increase in domestic demand for goods and services as well as
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The nominal interest rate is expected to rise higher than 0.5%.
• The other factor that needs to be considered is the global environment. UK is the fastest growing country in terms of economy in the G7. (BBC News, 2014). Therefore, many investors will be attracted to invest in the UK and demand for bonds would increase.
Graph 1
Source: Bloomberg Terminal Computer
• Based on Graph 1, the yield curve is expected to rise faster than the current yield curve. This is supported by the answer in a) where interest rate will rise in June 2015. The economy is expected to grow which will spur the interest rate up and there will be an upward shift in 2015 and to steepen somewhere at the end of 2017.
• In times of rising interest rates, short term yield is expected to be higher. In order to be protected against rise in interest rates, it is preferred to invest in short term duration bonds. This is to avoid the interest rate risk that will affect the price of the bond.
• If the fund is invested in a long term bond, the bond will have a risk of the price being discounted deeply (Investopedia, n.d.).
c) Credit Spreads and whether corporate bonds or government bonds will generate higher returns. Graph 2
Source: Bloomberg Terminal Computer
• Based on the answer in a), UK’s economy is forecasted to grow in 2015 onwards. During growth in an economy, the credit spread between gilts and corporate bonds will tighten because companies will perform better in a
After the economy hit a slowdown in the first quarter of 2015, the US economy has likely sped up in the second quarter. The labor and real estate markets are staying steadily on their recovery paths and should let the Federal Reserve,
Bonds are a debt investment, meaning the purchaser of the bond is loaning money to the company or government for a set period. They have a fixed interest rate, meaning the investor knows how much interest will be earned on the loan since the rate will not change.
The book, Death’s Acre: Inside the Legendary Forensic Lab the Body Farm Where the Dead Do Tell Tales written by Dr. Bill Bass and Jon Jefferson, tells of the life of Bill Bass and his forensic cases and adventures as a forensic anthropologist. He studies bones and human corpses to aid the law enforcement in identifying bones from unknown bodies or people. Dr. Bill Bass has also developed and built his own forensic lab, which he named “The Body Farm”. The Body Farm allows his him study the decomposition of dead bodies to better determine information that can be used to help solve crimes. Dr. Bill Bass has lived many places in his life. He lived in Kansas and taught there during the sixties. He also lived in South Dakota where he excavated Indian
The performance of the UK economy depends very much on the level of Aggregate demand within the economy. AD=C+I+G+(X-M). The UK economy can be judged by a number of key indicators mainly sustainable economic growth, low inflation (target 2%), a surplus on the
Inflation erodes the purchasing power of a bond 's future cash flows. A rise in inflation will cause investors to demand higher yields to compensate for inflation rate risk. Also, prices will tend to drop because the bond will be paying interest with less purchasing power.
The first kind of risk that could affect the bonds is credit risk. There is a chance that the bond could be defaulted, which means that the yield rate will decrease.
The Federal reserve needs to increase interest rates in the next year in order to reduce inflation. With low unemployment, the government is placing strain on the economy by lowering taxes and increasing spending. When the economy reaches its maximum output, prices increase while output remains the same. This could be what is happening now, with economic overheating on the horizon. However, the Federal Reserve could stifle this inflation by hiking interest rates over the next year. This would decrease the money supply and thus reduce inflation to its targeted level. It would also provide some leverage for the Fed to lower rates in the case of a recession.
Overall, we expect that the economic will grow at stable rate with relatively increase for the next 5 years.
As a result, bond rates tend to rise in order to create demand for them. Conversely, when investors are afraid of indicators in the financial sector, they turn to safer investments like bonds. The rate of return on these bonds drops in parallel with the increased demand for them.
In the time period shown in the BEA release highlights document (2015, bea.gov), it is clear that real GDP increased 2.0 percent in the third quarter of 2015, according to the third estimate by the BEA. The document also states that the main driver of the increasing GDP is the rise in consumer spending on
The inflation rate is constantly changing every day. The entire investment community is always on the look out for what the future inflation rate may be. It has been proven that a healthy economy preforms best when inflation rate is
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Britney is using a highly bureaucratic type of leadership in which for instance following rules and code of ethics, which is highly impersonal. She also seems to use her authority in a very heavy-handed way, and this is not effective in a creative function like public relations. The creative work is best completed through informal and less bureaucratic organizations. The team performance is more effective if the employees can coordinate and trust each
As technology continuously advances and expands in our culture and society, tablets have dominated computers and laptops in the workforce and textbooks in some schools in the United States. As tablets are becoming more prevalent, a debate has been established regarding whether K-12 school districts should switch from print textbooks to digital textbooks on tablets in the classroom. In definition, a tablet is a handheld computer, but they are usually much bigger than a cell phone. There are many reasons why school districts may or may not replace digital textbooks or tablets entirely. This particular topic is controversial and debatable because textbooks seem to be less prevalent than tablets. Although kids and teenagers still read print