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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.)