Major Assignment (Part A & B)

FIN30021 – FIXED INCOME AND DEBT MARKET

BUU PHAN TRUONG - 102653561
 (Part A)
The LIBOR Report

Executive Summary
This report aims to provide a thorough explanation of LIBOR's function, the reasons
for its replacement and what rates that will replace LIBOR in financial sectors
globally in currently and in future. In detail, the report includes definition of LIBOR,
the historical context for why LIBOR is the most widely used rate, where and by
whom LIBOR was used, the LIBOR calculation method, a comparison of LIBOR to
other rates and markets, the major issue and reason for the change of LIBOR, the
timeline for the changes, and finally, the proposed rates for both international and
Australian markets.
Contents
1. Introduction..........................................................................................................3
2. What is the LIBOR?.............................................................................................3
3. The historical background in relation why was it most dominate rate used?
3.1 The history background of LIBOR..................................................................3
3.2 Why was it most dominant rate used?...........................................................4
4. Where was it used and by whom?.....................................................................4
5. How is it calculated?...........................................................................................4
6. Did it produce similar rates for other markets?...............................................6
7. What has been the major problem with the rate and thus why is it being
changed?.......................................................................................................................
7.1 Overview of LIBOR Scandal.............................................................................7
7.2 The major problem with the LIBOR system...................................................8
7.3 Why was LIBOR changed?...............................................................................9
8. What is the timeline for the change?.................................................................9
9. What has been suggested as the replacement for the international markets
and for the rates in Australia?.................................................................................12
9.1 For the International market...........................................................................12
 In US market..................................................................................................12
 In UK market..................................................................................................13
 In Euro market...............................................................................................13
9.2 For the rates in Australia................................................................................14
10. Conclusion......................................................................................................15
11. Bibbliography..................................................................................................16
12. Appendix.........................................................................................................18
 1. Introduction
Since 1980, LIBOR has played a vital role in financial sectors worldwide. Although
there have been significant adjustments over time, LIBOR is still considered as one
of the most widely utilized rates in the financial sector for short-term loans. However,
as a result of many issues, LIBOR is becoming unreliable and being replaced by
some of the other rates in the international financial markets, particularly in Australia.
As a result, this report provides an in-depth examination of LIBOR and the factors
that contributed to its shift.

2. What is the LIBOR?

The London Interbank Offered Rate (abbreviated as LIBOR) is a common interest
rate benchmark that significant banks use when lending unsecured loans to one
another in the international interbank market. Particularly for short-term loans
ranging from overnight to twelve months (Needhame, 2012). LIBOR impacts almost
every either large business or individual on an indirect or direct basis. Besides, the
LIBOR may also be considered as a measure of economic and financial system
confidence. The higher the LIBOR rate, the more concerned banks are about their
peers (Moneywise, 2021).
Recently, the Intercontinental Exchange (or ICE) is controlling LIBOR. Before,
LIBOR used to be calculated using a variety of maturities and currencies. Since
2013, the ICE has stopped setting LIBOR for various currencies and maturities.
Thus, only five official currencies remained: Swiss franc (CHF), pound sterling
(GBP), euro (EUR), yen (JPY) and dollar (USD) (Global-rates 2021). There were
also seven official maturities (or tenors) after those currencies: overnight/spot next,
one week, one, two, three, six, and twelve months (Kagan 2021). With seven
maturities and five currencies, a total of thirty-five LIBOR rates are computed and
recorded. Then, official findings are issued daily to hundreds of banks and other
financial institutions as the based rates (McConnell, 2013).

3. The historical background in relation why was it most dominate rate

used?
3.1 The history background of LIBOR
The London Interbank Offered Rate (LIBOR) was created in the 1980s as demand
for loan services surged as a result of the London Eurodollar market's expansion.
LIBOR was first regulated by the British Banker's Association (BBA). Under the
BBA's supervision, many steps were made beginning in 1984, culminating in the
release of the first LIBOR interest rates (BBA LIBOR) in 1986. However, as a
consequence of the increasing LIBOR manipulation phenomena, the administrator of
LIBOR was transferred to the Intercontinental Exchange (ICE) (ICE, 2014, p. 1).
Since then, many alterations have occurred, including the renaming of LIBOR, from
BBA LIBOR to ICE LIBOR in February 2014.

Additionally, the LIBOR currencies and maturities were also adjusted. After the euro
was adopted, several of the currencies and maturities were dissolved or combined,
and new currency rates were implemented. Notably, the 2008 financial crisis
substantial reduced the number of tenors utilized to calculate LIBOR.
 3.2 Why was it most dominant rate used?
Obviously, the more important LIBOR is in the financial business, the more dominant
it is internationally. LIBOR has traditionally been used as a benchmark for a wide
variety of financial instruments, including options, swaps, and futures. It is used to
determine liquidity premiums on various money market instruments and is a
measure of the banking system's general health. Additionally, a variety of derivative
products also utilize LIBOR as a trading, launching, and development reference.
Besides, it also acted as a benchmark for price discovery, clearing, and product
assessment (Kagan 2021).

4. Where was it used and by whom?

As previously stated, LIBOR is an average interest rate that banks in London
compute when borrowing money from other lenders. As a result, it's easy to see how
LIBOR was first utilized by banks in London before being expanded to include inter-
banks and financial organizations from all over the globe.
Essentially, the LIBOR rate is used by the major banks in London to determine a fair
amount of money that may be borrowed from one another (Kiff 2012). Then there's
the fact that LIBOR rates are important all over the world, acting as a basic reference
point for interest rates for a huge number of lenders, including financial institutions
and banks. For instance, several central banks have used LIBOR to determine their
operational policy objectives (most notably the Swiss National Bank) (Schrimpf and
Sushko, 2019, p. 33).
Additionally, LIBOR is often discussed when individuals are negotiating loans, bonds,
or even mortgages and student loans (IBA 2014). Thus, since LIBOR is the
fundamental reference rate for consumer loans in all nations, it affects both
consumers and financial institutions. As a consequence, individuals across the globe
will consider not just interbank and financial institutions when making borrowing
choices, but also LIBOR.

5. How is it calculated?
LIBOR is a reference rate that is computed on every London business day by ICE
Benchmark Administration Limited (IBA).

In the simplest way to understand, The Intercontinental Exchange (the organization

that calculates and publishes Libor interest rates) asks the world's biggest banks
(usually 11 to 16 large, international banks) to answer the following question: “At
what rate could you borrow funds, were you to do so by asking for and then
accepting interbank offers in a reasonable market size just prior to 11 a.m. London
time?" (ICE 2020) on a daily basis. This usually happens early in the day, well ahead
of the formal hours for posting the benchmarked rate.

By reducing 25% of the higher and lower quoted rates, outlying quotes are
eliminated. The remaining rates are averaged and rounded to five decimal places
after outliers are removed. The process is repeated for each maturity across the five
currencies, yielding a total of 35 LIBOR rates.
For membership on the ICE LIBOR panel, which is chosen annually, only banks with
a major presence, which satisfy the ICE's standard based on its reputation, market
volume, and presumed understanding of the currency in question in the London
market, are considered (global-rates 2021). The US dollar LIBOR, for example,
covers major US institutions such as JPMorgan Chase, Bank of America, and
Citibank.

Once again, to setting rates for each currency, the contributions to a currency’s panel
of the panel banks are vitally important. These contributions are determined through
the use of a standardized, transaction data-driven waterfall submission, called the
Waterfall Methodology introduced by IBA in April 2018 (Appendix 1). This submission
methodology is designed to produce a rate that is anchored in Panel Banks'
wholesale, unsecured funding transactions to the greatest extent possible, with a
waterfall to enable a rate to be published in all market circumstances.

In detail, the Waterfall methodology is computed as the following levels:

 Level 1 - transaction-based: including the calculation of the volume-

weighted average price (VWAP) of all qualifying transactions (Kargan 2021).
As stated by Kagan (2021), transactions given by a panel bank may have
booked closer to 11:00 a.m London time a higher weighting.
 Level 2 - transaction-derived: if a panel bank does not have enough
qualifying transactions to complete a Level 1 submission, the transaction-
derived level then requires assessing submissions using transaction-derived
data.
 Level 3 - expert judgment: occurs when a panel bank is unable to provide
standard data that satisfies Level 1 or Level 2 standards. As a result, It will
submit the rate at which it might finance itself at 11:00 a.m. London time,
based on the wholesale unsecured financing market (Vick 2021, p. 3).

The IBA calculates the LIBOR rate using a trimmed mean technique applied to all
responses. Trimmed mean is a method of averaging that eliminates a small
percentage of the biggest and smallest values before computing the mean. In
LIBOR, the figures in the highest and lowest quartiles are removed, and the
remaining numbers are averaged (Vick, 2021, p.4); for further information, see (Table
5.1) and (Appendix 2).

Table 5.1: The trimming setting in relation to LIBOR Contributor Bank's submission
(Vick, 2021, p.8)

After all, interest rates for each period and currency will be released once daily,
shortly after they are computed, at roughly 11:55 a.m. (London time).
 6. Did it produce similar rates for other markets?
IBORs, notably the London Interbank Offered Rate (LIBOR), has been a part of the
daily routine of the global financial services sector for more than 40 years, and they
continue to be so today. They've established the benchmark rate for unsecured
lending, which serves as the foundation for the worldwide trade in financial assets
ranging from bonds and loans to derivatives and mortgage-backed securities and
everything in between (Woods, 2020).

Despite the fact that LIBOR is the most widely used and acknowledged interest rate
in the world, there are many alternative versions of interest rates in use across the
world, including EURIBOR, TIBOR, SHIBOR, and MIBOR, among others.

 EURIBOR

A reference rate known as the Euro Interbank Provide Rate (or Euribor) is calculated
by taking the average interest rate at which eurozone banks offer unsecured short-
term loans on the interbank market and dividing it by the number of eurozone banks.
Euribor is computed using loans with maturities ranging from one week to one year,
with the average maturity being one week (Hayes, 2020).

There are 20 distinct panel banks that make up Euribor. Listed below are the
financial institutions in the eurozone that handle the greatest number of money
market transactions (Hayes, 2020). The European Money Markets Institute
calculates Euribor by requesting daily interest rates from each of the euro zone's
banks, which are then averaged together. The Euribor is calculated by taking the
arithmetic mean of the remaining values after removing the 15 percent of the
market's highest and lowest interest rates (Bankinter, n.d.).

Trading in the euro wholesale money market (also known as the interbank market)
takes place over the counter; only banks, the European Central Bank, central
national banks, and a few finance firms and credit institutions are permitted to
transact in it (ING, n.d.).

 TIBOR

A daily reference rate computed from interest rates paid by banks in the Japanese
interbank market to lend cash to other banks, the Tokyo Interbank Offered Rate
(TIBOR) is the Tokyo Interbank Offered Rate (TIBOR). The European TIBOR rate
and the Japanese Yen TIBOR rate are the two types of TIBOR rates available to
investors. JBATA generates the JBA TIBOR as a prevailing market rate by
aggregating bids for six different maturities and averaging them together (one week,
one month, two months, three months, six months, and 12 months) (Kenton, 2021).

For the TIBOR, the JBATA subtracts the two top and bottom maturity reference rates
before computing the average of the remaining rates, which is then subtracted from
that result. The average maturity rates are calculated with the use of the TIBOR
rates, which include six rates for the Japanese yen and six rates for the Euroyen. As
stated by Kenton (2021), any TIBOR rate that is released outside of the authorised
information sources is solely for educational purposes and should not be considered
official. There are various official information providers such as Jiji Press Ltd.,
Thomson Reuters Markets KK, Nomura Research Institute Ltd., Bloomberg Finance
L.P, and QUICK Corp report the TIBOR rates, as do other financial institutions.

 BBSW

The Bank Bill Swap Rate (BBSW) is a short-term interest rate that is used to
determine the price of Australian dollar derivatives and securities, notably floating
rate bonds, and is calculated daily. The BBSW is a self-contained reference rate that
is used to determine the pricing of financial instruments. BBSW is the benchmark
used by fixed income investors to price floating rate bonds and other assets, and it is
based on the Bloomberg Stock Index. A risk premium is added to the BBSW in
comparison to the risk-free rate, which is often based on government bonds, in order
to compensate for the risk associated with the assets. (Murphy, 2021).

7. What has been the major problem with the rate and thus why is it being
changed?
7.1 Overview of LIBOR Scandal

The LIBOR is a global interest rate benchmark that is used to price loans and
derivatives all around the world. It is created using reference interest rates submitted
by member banks.

Since the pressured market conditions of 2007 and 2008, there have been concerns
about LIBOR. However, in 2012, it was revealed that LIBOR had been rigged by
select Panel Banks, bringing it to international attention. Because of the scandal of
LIBOR, the Government had to launch "the Wheatley Review" in November 2012
(IBORs, 2021).

During the LIBOR Scandal, traders at many of these banks reported artificially low or
high interest rates in order to shift the LIBOR higher or lower in order to promote
their own derivatives and trading activity (Fernando, 2021).

As stated by Fernando (2021), the LIBOR Scandal was a well-publicized plot in

which bankers from a number of large financial organizations conspired to influence
the London Interbank Offered Rate (LIBOR). The financial industry was shaken by
the incident, which resulted in a flurry of penalties, lawsuits, and regulatory actions.
Despite the fact that the scandal broke in 2012, there is evidence that the
collaboration in question had been going on since 2003.

Deutsche Bank (DB), Barclays (BCS), Citigroup (C), JPMorgan Chase (JPM), and
the Royal Bank of Scotland (RBS) were among the large financial institutions
involved in the scandal (RBS). LIBOR's credibility as a reliable benchmark rate has
been called into question as a result of the rate-fixing affair, and it is being phased
out. LIBOR will be phased out by June 30, 2023, and replaced by the Secured
Overnight Financing Rate, according to the Federal Reserve and UK regulators
(SOFR). After December 31, 2021, the LIBOR one-week and two-month USD LIBOR
rates will be discontinued as part of this phase-out (Fernando, 2021).
 7.2 The major problem with the LIBOR system

IBORs (2021) stated that the first and most important problem with LIBOR is that it
operates on the assumption of a permanent and deep unsecured interbank market.

This hypothesis has been considerably undermined as interbank market volatility has
decreased over time for a variety of reasons, including:

 Few participants want to lend on an uninsured basis since the financial crisis,
especially for a time longer than overnight (e.g. 3 months).
 Liquidity in the inter-bank market has been dwindling since the 1990s, and it
vanished entirely during the crisis, revealing that the premise underpinning
LIBOR was more than just theoretical in stress situations.
 Banks have withdrawn from the market because short-term wholesale debt
draws greater regulatory capital than other forms of debt.

Moreover, other repercussions of the shift of liquidity away from unsecured interbank
markets include:

 Banks have become increasingly hesitant to submit estimates based on an

inactive market due to the potential of lawsuits; in fact, several banks have
stopped submitting quotes altogether.
 The price discovery mechanism has been further harmed, as has LIBOR's
fundamental legitimacy as a benchmark.

"The cases of attempted market manipulation and false reporting of global reference
rates, together with the post-crisis decline in liquidity in interbank unsecured deposit
markets, have undermined confidence in the reliability and robustness of existing
interbank benchmark interest rates." The FSB Report

The second problem of LIBOR is the way it was generated. It is very strange when
there is still a world that believes perceptions should be reported truthfully? The main
issue is that the method for determining Libor dates from a time when trusting people
in finance was the norm.

Let's move through the technical details of this calculation for a better understanding
of this hole:

Every day, 16 banks in London, including banks of the United States, notify Thomson
Reuters that this is the interest rates they expect to pay on borrowings, ranging from
the short-term to the one-year term. Thomson Reuters then announced the four
lowest and four highest interest rates of this group of banks and the average of the
remaining eight. That average number is used as a standard to calculate about 150
different interest rates on world markets. The detail that should be noted here is that
the announced interest rate is only the interest that the bank expects to pay, not the
actual interest paid. In other words, this is just an expectation or estimate.

For decades, the formula has been remarkably close to reality, and it is now used by
everyone, including the government, to compute interest rates on bonds. However,
such an estimate is sometimes merely a guess, or even a compromise and a
dishonest settlement.
During the financial crisis of 2008, this "sometimes" happened. The globe faced
credit crunches and liquidity shortages at the time, and the interbank market was
essentially shut down because banks had run out of cash. Banks do not dare borrow
at any interest rate from each other.

So, there will be no more base interest rates, will there? Despite the fact that the
figures supplied are made up, they are still released because without it, people will
get lost. Because of that, many banks actually provide low interest rates to
demonstrate that their firm is still thriving. Some banks have high interest rates
because they believe they will be able to file lesser taxes later.

7.3 Why was LIBOR changed?

Not only was it entangled in scandals, LIBOR also faced many other problems
related to the international banking market. According to ICE, banks aren’t
transacting business the same way, and, as a result, Libor rates have become a less
reliable benchmark. ICE won’t guarantee that Libor will even be available by the end
of 2021 (Curry, 2021).

The primary goal of the reform of LIBOR was to create numerous alternative
reference rates, or at least two: a risk-free rate and a rate that represented bank
credit risk. The thinness of the underlying market for term unsecured bank borrowing
hindered efforts by public and private groups to update LIBOR so that it could
continue to function as the risk-sensitive benchmark. Attempts to build LIBOR
alternatives were also hampered by a lack of transactions (Nelson, 2019).

More recently, the prospect of LIBOR panel banks dropping out by 2021 because of
legal concerns has added urgency to the efforts to shift financial contracts to a more
reliable benchmark. While there is at least one remaining contender for a risk-
sensitive rate, questions remain about its robustness, especially during periods of
stress. Dollar-LIBOR reformers have focused exclusively on SOFR, both because
most see it as the best long-run solution and because of the need to encourage
market participants to begin conversion without delay (Nelson, 2019).

8. What is the timeline for the change?

Because LIBOR has such a huge impact on the financial economy around the world,
changing or converting LIBOR can be considered as the most time-consuming
preparation and implementation for the financial industry as a whole.

The following is a detailed timeline of the changing Libor:

September 2012: The Wheatley study of the UK Financial Services Authority

proposes LIBOR reform rather than replacement.
In 2014:
 The ICE Benchmark Administration takes over LIBOR administration
from the British Banking Authority and begins LIBOR reform in
February.
 The Financial Stability Board proposes the introduction of RFRs in
June.
 The EU Benchmarks Regulation was published in the Official Journal in
June 2016.
In 2017:
 SONIA was recommended as a Sterling alternative by the Working
Group on Sterling Risk-Free Reference Rates in April 2017.
 The FCA states that panel banks have agreed to keep LIBOR going
until the end of 2021, but that after that date, the FCA will no longer
utilize its powers to keep LIBOR going in July.
In the year 2018:
 January: Most of the EU Benchmarks Regulation's provisions, subject
to transitional measures, take effect.
 The European Money Markets Institute believes that EONIA is unlikely
to comply with the Benchmarks Regulation in February 2018.
 The Alternative Reference Rates Committee (ARRC) of the United
States published guiding guidelines for the development of fallback
language for new financial contracts for cash products in July.
 The ISDA Benchmarks Supplement will be published in September and
gives firms the ability to improve the contractual robustness of
derivatives that reference interest rate, FX, equity, and commodities
benchmarks (ISDA, 2018).
In 2019:
 The US Alternative Reference Rates Committee (ARRC) published
proposed contractual fallback language for floating rate notes based on
US Dollar LIBOR in April.
 July: The European Money Markets Institute (EMMI), as EURIBOR's
administrator, announces that EURIBOR has been granted
authorization under the EU Benchmarks Regulation, based on a new
hybrid methodology that EU authorities consider to be strong, resilient,
and transparent.
 From the first publishing date of €STR on October 2, 2019 to the end of
2021, EONIA becomes €STR plus a spread during a transition period.
In 2020:
 A proposal for New York State legislation to provide a commercially
reasonable remedy for "difficult legacy" contracts was published by the
US Alternative Reference Rates Committee (ARRC) in March. The
New York Fed (as the SOFR's administrator) began providing 30, 90,
and 180-day SOFR Averages, as well as a SOFR Index.
 April: The US Alternative Reference Rates Committee (ARRC)
announces that a spread adjustment technique for cash products
referencing USD LIBOR has been agreed upon. ARRC also
announced its key objectives for 2020, which are related to "Supporting
SOFR Use and Liquidity", "Contractual Fallbacks", "Legal, Tax,
Accounting, and Regulatory Clarity", "Outreach, Education, and Global
Coordination", etc... 2021 (Newyorkfed)
 July: Bloomberg Index Services Limited (BISL) begins calculating and
releasing adjusted RFRs (compounded in arrears), spread
adjustments, and 'all in' IBOR fallback rates for a variety of IBORs
across numerous tenors, such as EURIBOR, Euro LIBOR, HIBOR,
Sterling LIBOR, Swiss franc LIBOR, Euroyen TIBOR, Yen LIBOR, Yen
TIBOR.
 August: The Bank of England begins releasing a daily SONIA
Compounded Index. LSTA also announced an initiative to establish
 amending forms for syndicated loans. The LSTA led the creation of two
significant ARRC publications: updated hardwired fallback wording in
June and recommended norms for syndicated loans in July.(Virmani,
2020).
 September: The Working Group on Sterling RFRs publishes a
suggestion that any relevant SONIA rate chosen or recommended to
replace GBP LIBOR should indeed be calculated using the historical
five-year median spread adjustment methodology when trying to
calculate the credit adjustment spread.
 UK legislation (The Financial Services Bill 2019-21) recommended
implementing the UK Benchmarks Regulation to ensure an orderly
wind-down of LIBOR in October. New York state legislation (based on
the ARRC's April 2020 draft legislation) proposed to add statutory
provisions to the Uniform Commercial Code to apply when the US
Dollar LIBOR ceases to be representative.
 December: ARRC-recommended deadline for new issuances of US
Dollar LIBOR floating rate [Link] Benchmark Administration Limited
(IBA) consults on proposed LIBOR cessation dates. The FCA consults
on potential new powers under the UK Benchmarks Regulation.
In 2021:
 ISDA Supplement 70 to the 2006 ISDA Definitions and ISDA 2020
IBOR Fallbacks Protocol go into effect in January 2021. ICE
Benchmark Administration Limited (IBA) announces the launch of a
series of benchmark Term SONIA Reference Rates in January.
 February: The European Commission is given the authority to require
the adoption of a selected replacement rate for LIBOR in a wide range
of contracts and financial instruments under the EU Benchmark
Regulation.
 March: Cut-off date for new Sterling LIBOR loans, bonds,
securitisations, and linear derivatives (except for risk management of
existing positions). The FCA announces the dates when LIBOR rates
will either stop being provided or stop being representative of their
underlying market. The ISDA spread adjustment fixes all LIBOR rates.
 June: ARRC-recommended cut-off date for new US Dollar LIBOR loan
and derivative issuance (except for risk management of existing
positions).ARRC-recommended cut-off date for new issuance of GBP
LIBOR non-linear derivatives (with the exception of risk management of
existing positions).
 December: The ICE Benchmark Administration (IBA) will stop
publishing 26 LIBOR benchmark settings after December 31, 2021.
The 1-month, 3-month, and 6-month Japanese Yen LIBOR settings, as
well as the 1-month, 3-month, and 6-month Sterling LIBOR settings,
will no longer be representative after December 31, 2021, and
representativeness will not be restored (FCA announcement 5 March
2021) (Duffee et al. 2021).
 Expiry of third-country transitional provisions under UK Benchmarks
Regulation
In 2023:
 After 30 June 2023, ICE Benchmark Administration (IBA) will stop
publishing the overnight and 12-month US Dollar LIBOR settings that it
 now publishes. The 1-month, 3-month, and 6-month US Dollar LIBOR
settings will no longer be representative after June 30, 2023, and
representativeness will not be restored (FCA announcement, 5 March
2021).
 Expiration of third-country transitory protections under the EU
Benchmarks Regulation in December 2023 (subject to possible
extension to December 31st, 2025) (Mccannfitzgerald, 2021)

According to the timeline, the process started in July 2017 after the announcement
by the FCA that, after 2021, panel banks will no longer be required to participate in
the LIBOR determining process (ADB, 2021, p.2).

The expected changeover date is December 31, 2020. The FCA has stated that all
global market participants should assume that there will be no LIBOR publication
after 2021. Markets for LIBOR-related contracts are likely to be illiquid, and the ability
to hedge outstanding LIBOR obligations is likely to be harmed and markets for
LIBOR-related contracts are likely to be illiquid. As a result, worldwide market
participants holding LIBOR-linked financial instruments must plan to transition to
ARRs by December 31, 2020 (ADB, 2021, p.2).

9. What has been suggested as the replacement for the international

markets and for the rates in Australia?
9.1 For the International market
 In US market

The Federal Reserve Board and the Federal Reserve Bank of New York established
the Alternative Reference Rates Committee (ARRC) to develop a LIBOR substitute.
The OFR, an ARRC member, worked with the Federal Reserve and the Federal
Reserve Bank of New York to produce three new interest rates. In June 2017, the
ARRC endorsed the Secured Overnight Financing Rate (SOFR) as a substitute for
US currency LIBOR (OFR, n.d)

Unlike LIBOR, the Treasury repo market is very liquid—approximately 1,500 times
the volume of interbank loans as of 2018—making it a potentially more accurate
indication of borrowing prices. Furthermore, unlike LIBOR, the secured overnight
financing rate (SOFR) is based on data from observable transactions, not on
assumed borrowing rates (Kurt, 2020).

The SOFR is calculated using repo rates. A repo, or repurchase agreement, is a type
of secured loan in which one party sells an asset to another and promises to buy it at
a certain date and price in the future. Due to the fact that repos are a significant
source of short-term funding in the financial system, a rate based on these
transactions would make an excellent alternative reference rate (Kurt, 2020).

The SOFR will include overnight Treasury-backed repo transactions that occur in the
Bank of New York Mellon's tri-party repo system or are cleared through one of two
Fixed Income Clearing Corporation platforms:

 Delivery Versus Payment (DVP) Repo Service

 General Collateral Finance (GCF) Repo Service
The OFR issued a regulation in February 2019 to establish a data gathering system
for centrally cleared financing transactions in the US repo market. The data collected
will be utilized to improve the SOFR's productivity (OFR, 2019)

Prior to the ARRC's work, the OFR partnered with the Federal Reserve and the
Securities and Exchange Commission on a voluntary pilot study in 2015 to examine
how to gather data on bilateral repo agreements (Baklanova, 2016).

Transitioning to a new reference rate will require broad market approval.

Collaboration between business and government will be critical to ensuring a
seamless and expeditious transition. The OFR is involved in the planning and
execution of the alternative reference rate (ARRC, 2021).

 In UK market

SONIA was chosen as the recommended risk-free rate to replace LIBOR in 2017.
The Sterling Overnight Index Average is denoted as SONIA. This is an active
benchmark managed by the Bank of England, which is also responsible for its
administration and publishing (UK Finance, 2019).

SONIA is an unsecured overnight rate derived using qualifying transactions reported

to the Bank of England through the collection of sterling money market data. It is
based on real transactions and is the average interest rates that banks pay to other
institutions to borrow sterling overnight (UK Finance, 2019).

Given that SONIA is a daily rate, interest accrues daily. To calculate ‘compounded
SONIA', take the daily overnight SONIA interest rate for the period and compound it.
Because each day's SONIA fixing is required to calculate interest, compounded
SONIA interest is only known at the end of the interest period (unlike LIBOR). For an
equal term, using compounded daily rate fixes should minimize the volatility of
SONIA relative to LIBOR, smoothing daily variations while closely matching the
period over which interest is computed. Compound SONIA is projected to be the
preferred calculating technique for derivative markets (UK Finance, 2019).

 In Euro market
Eur Libor To Be Replaced By €ster (Euro Short-Term Rate).

The euro short-term rate (€STR) measures the wholesale euro area banks'
unsecured overnight borrowing rates. Each business day, the €STR is reported
based on transactions performed and settled on the previous business day (the
reporting date "T") with a maturity date of T+1 that is judged to have been executed
at arm's length and so accurately represent market rates.
The €STR is fully composed of secret daily statistical data on money market
transactions gathered in accordance with the Money Market Statistical Reporting
(MMSR) Regulation.

The MMSR website includes a list of reporting agents. The ECB receives statistical
input data from four national central banks: the Deutsche Bundesbank, the Banco de
Espaa, the Banque de France, and the Banca d'Italia. The methodology and
regulations governing the €STR specify the process of calculating. Each year, the
ECB conducts a review of the €STR methodology and releases a report. (ECB,
2021).

9.2 For the rates in Australia

Australia's domestic reference rates are calculated using a multiple-rate technique.

The multiple-rate method is used to calculate Australia's domestic reference rates.

Mainly steady in recent years, the BBSW is the main domestic credit-based
benchmark. Since the local bank bill market has enough transactions (unlike LIBOR),
A varied range of wholesale investors purchase bank bills in Australia, which has a
vibrant industry. The benchmarking procedure has also been improved recently. It
will be replaced by the cash rate (Australia's RFR), although unlike LIBOR, it will
continue to exist, a month bank notes are unusual. BBSW symbolizes banks buying
one-month bills at this time of the year. This tenor has less liquidity than the one-
month BBSW (RBA, 2021).

Derivatives contracts' Fallback Protocol includes BBSW as a precautionary step,

notwithstanding its continued strength as a benchmark. Financial contracts based on
any reference rate must include fallbacks. The BBSW fallback rate is the overnight
cash rate plus a spread based on the historical gap. A sufficient number of fallback
provisions is required by the Reserve Bank in order for contracts mentioning BBSW
to be accepted as collateral in open market operations. This requirement's
implementation is based on industry feedback (Bloomberg, 2021).

Australia has prioritized LIBOR conversion despite BBSW's robustness. In Australia,

LIBOR contracts continue to be significant due to the global nature of banks and
other organizations. An anticipated $8 trillion in notional LIBOR exposures for the
major Australian financial institutions by 2020. However, by 2020, the largest
Australian financial institutions' LIBOR exposures will have decreased significantly. A
few institutions' exposures rose (ASIC, 2021).

In view of these enormous exposures, financial regulators strongly promote and

facilitate a move away from LIBOR

To guarantee satisfactory progress and, in particular, compliance with LIBOR

deadlines, ASIC and the Australian Prudential Regulation Authority (APRA) are
closely monitoring the LIBOR transitions of their regulated enterprises. According to
the worldwide transition plan, LIBOR will be phased out of new contracts by the end
of 2021, and ASIC and the Reserve Bank require financial institutions to comply with
the ISDA Fallbacks Protocol. Firms should aim for a smooth transition away from
LIBOR by the end of 2021 for the remainder of 2018 (RBA, 2021).

10. Conclusion

After all, the demise of LIBOR, one of the most significant financial standards, is
drawing near. Substituting risk-free alternative rates for the London Interbank Offered
Rate (LIBOR) is a vital transformative initiative in today's global financial markets.
Banks and other financial institutions must move quickly to ensure a smooth
transition to risk-free rates. Financial institutions should conduct a quick evaluation to
ensure a cost-effective and timely transition. Any delays in implementation might
result in a significant increase in cost (Mindtree, 2021).
As the LIBOR changeover date approaches, comprehensive data and creative
technologies like these will be critical in assisting businesses in maximizing efficiency
and minimizing interruption in their daily operations (Rank-Broadly, 2021).
The effect of Covid-19 on companies has expedited the LIBOR changeover. There is
much that has to be completed over the next year or two in terms of commercial,
legal, and regulatory issues. Once a replacement rate has been agreed upon,
transactions and systems must be re-papered. Algorithms for compounding will be
necessary for an RFR compounded in arrears (the new standard in sterling markets)
(Brown, 2020).
Businesses that participate in active institutional involvement, on the other hand,
may stand to benefit from the shift in the market environment. LIBOR (term
unsecured lending between banks) became a troublesome benchmark rate during
the financial crisis of 2007–2008, owing to claims of LIBOR manipulation and a lack
of trading activity. Because of that, the world needs something more up to date is
both required and appreciated.
 11. Bibbliography

ADB 2020, LIBOR Transition Frequently Asked Questions, viewed 12 October

2021, <[Link]
[Link]>.
Alim, S & Connolly, E (2018), ‘Interest Rate Benchmarks for the Australian Dollar’,
viewed 13 October 2021,
<[Link]
[Link]>
Bankinter, 2021, What is Euribor and how does it affect me?, viewed 12 October
2021, <[Link]
how-does-it-affect-me>
Bloomberg, 2021, LIBOR fallbacks and transition, viewed 12 October,
<[Link]
[Link]>
Brown, M 2020, The end of libor: be ready and find the opportunities, viewed 12
October, <[Link]
end-of-libor-be-ready-and-find-the-opportunities>

Council of Financial Regulators (2016), ‘Financial Benchmarks Regulatory Reform’,

Consultation, viewed 17 October 2021,
<[Link]
regulatory-reform/>
Debelle, G (2019), ‘Progress on Benchmark Reform’, viewed 13 October 2021,
<[Link]
Duffee, D K., Forrester, J P & Miller, M J N (2021), IBA Sets LIBOR Publication
Cessation Dates and Triggers a LIBOR Transition Event, Mayer Brown, viewed 12
October 2021, <[Link]
events/blogs/2021/03/iba-sets-libor-publication-cessation-dates-and-triggers-a-libor-
transition-event>
IBA 2018, ‘ICE LIBOR Evaluation Report’, Intercontinental Exchange, 25 April,
viewed 10 October 2021,
<[Link]
df>
IBA 2021, ICE Benchmark Administration (IBA) publishes position paper on the
evolution and enhancement of ICE LIBOR (“LIBOR”), Intercontinental Exchange, 20
October, viewed 12 October 2021,
<[Link]
[Link]>
[Link] 2021, What’s wrong with LIBOR?, IBORs, viewed 13 October
2021, <[Link]
Jason Fernando, 2021, ‘The LIBOR scandal’, Investopedia, viewed 13 October
2021, <[Link]
Kagan, J 2021, ‘London Interbank Offered Rate (LIBOR)’, Investopedia, 14 March,
viewed 10 October 2021, <[Link]
Kent, C. 2021, ‘The End of Libor and the Australian Market’, Reserve Bank of
Australia, viewed 12 October 2021, <[Link]
[Link]>
Kenton, W 2021, ‘Tibor’, Investopedia, 1 September, viewed 13 October 2021,
<[Link]
Kiff, J 2012, What Is LIBOR? Back to Basics, viewed 12 October 2021,
<[Link]
LIBOR, information about the London Interbank Offered Rate, global-rates, viewed
10 October 2021, <[Link]
[Link]>.
[Link]. 2021, Recent Amendments to the EU Benchmark Regulation
and EMIR, McCannFitzGerald, viewed 12 October 2021,
<[Link]
eu-benchmark-regulation-and-emir>
McConnell, P (2013). ‘Systemic operational risk: The LIBOR manipulation scandal’.
The Journal of Operational Risk, 8(3), 59-99.
Mindtree, 2021, LIBOR transition, viewed 17 October 2021,
<[Link]
Murfy, C B (2021), ‘Bank Bill Swap Rate (BBSW)’, Investopedia, 31 January, viewed
12 October 2021, <[Link]
[Link]>
Needham, C. (2012). LIBOR manipulation and its consequences. Library Briefing:
Library of the European Parliament. no. 120343REV2. pp.1-6.
<[Link]
.pdf>.
Neha, S 2021, ‘Who uses Libor data and why?’, Investopedia, 27 August, viewed 10
October 2021, <[Link]
[Link]>
Rank-Broadley, J 2021, The LIBOR transition: Challenges, developments and
solutions, Refinitiv, viewed 17 October 2021,
<[Link]
challenges-developments-and-solutions/>
Schrimpf, A and Sushko, V. 2019, Beyond LIBOR: a primer on the new benchmark
rates, [Link], 5 March, viewed 12 October 2021,
<[Link]
Vick, E 2021, ‘ICE LIBOR Methodology’, Intercontinental Exchange, 6 January,
viewed 10 October 2021
<[Link]
Vick, E 2021, ‘ICE LIBOR® Code of Conduct’, Intercontinental Exchange, 21 May,
viewed 10 October 2021,
<[Link]

12. Appendix

Appendix 1: The Waterfall Methodology (IBA, 2018, p. 10)

Appendix 2: The LIBOR panel composition (IBA, 2018, p. 8)

 Appendix 3: Timeline of LIBOR transition

Appendix 4: Alternative RFRs in selected currency areas (ECB 2021)

 (Part B)

Treasury Treasury Treasury Treasury Treasury Treasury

bonds bonds bonds bonds bonds bonds
Treasury Treasury Treasury Treasury Treasury Treasury
bonds 151 bonds 137 bonds 164 bonds 155 bonds 163 bonds 147
2,00% 2,75% 0,50% 2,50% 1,00% 3,25%
21/12/2021 21/04/2024 21/09/2026 21/05/2030 21/11/2031 21/06/2039

(a) The purchasing prices for each instrument are:

 Treasury bonds 151: $101.388 (increase)
Treasury bonds 151 Explain
Coupon 2,00%
Maturity 21/12/2021
Yield 1,228%
Settlement Date 01/09/2020
Next Coupon 21/12/2020
Last coupon 21/06/2020
From 1/09/2020 to
21/12/2020
f 111 =29+31+30+21
From 21/06/2020 to
d 183 21/12/2020
g 1
c 1
n 2 (2 in 2021)
i 1,228000%
v (f/d) 0,996294009
a (i:n) 1,981729649
100vn 98,783218
Price $ 101,388

 Treasury bonds 137: $108.011 (increase)

Treasury bonds 137 Explain

Coupon 2,75%
Maturity 21/04/2024
Yield 0,790%
Settlement Date 01/09/2020
Next Coupon 21/10/2020
Last coupon 21/04/2020
From 01/09/2021 to
f 50 21/10/2020 =29+21
From 21/04/2020 to
d 183 21/10/2020
g 1,375
c 1,375
2 each year and 1 in
n 7 2024
i 0,790000%
v (f/d) 0,998923471
a (i:n) 6,890697779
100vn 97,27817438
Price $ 108,011

 Treasury bonds 164: $97.039 (decrease)

Treasury bonds 164 Explain
Coupon 0,50%
Maturity 21/09/2026
Yield 1,044%
Settlement Date 01/09/2020
Next Coupon 21/09/2020
Last coupon 21/03/2020
From 01/09/2020 to
f 20 21/09/2020=20
From 21/03/2020 to
d 184 21/09/2020
g 0,25
c 0,25
2 each year from
n 12 2021 to 2026
i 1,044000%
v (f/d) 0,999434245
a (i:n) 11,60256746
100vn 93,94345979
Price $ 97,039

 Treasury bonds 155: $105.402 (increase)

Treasury bonds 155 Explain

Coupon 2,50%
Maturity 21/05/2030
Yield 1,966%
Settlement Date 01/09/2020
Next Coupon 21/11/2020
Last coupon 21/05/2020
From 01/09/2020 to
f 81 21/11/2020=29+31+21
From 21/05/2020 to
d 184 21/11/2020
g 1,25
c 1,25
n 19 2 each year and 1 in 2030
i 1,966000%
v (f/d) 0,995703052
a (i:n) 17,25417045
100vn 83,03915045
Price $ 105,402

 Treasury bonds 163: $91.338 (decrease)

Treasury bonds 163 Explain
Coupon 1,00%
Maturity 21/11/2031
Yield 1,888%
Settlement Date 01/09/2020
Next Coupon 21/11/2020
Last coupon 21/05/2020
From 01/09/2020 to
21/11/2020 =
f 81 29+31+21
From 21/05/2020 to
d 184 21/11/2020
g 0,5
c 0,5
2 each year from
n 22 2021 to 2031
i 1,888000%
v (f/d) 0,995872382
a (i:n) 19,78190533
100vn 81,32588137
Price $ 91,338

 Treasury bonds 147: $148.920 (increase)

Treasury bonds 147 Explain

Coupon 3,25%
Maturity 21/06/2039
Yield 0,545%
Settlement Date 01/09/2020
Next Coupon 21/12/2020
Last coupon 21/06/2020
From 01/09/2020 to
21/12/2020 =
f 111 29+31+30+21
From 21/06/2020 to
d 183 21/12/2020
g 1,625
c 1,625
n 37
i 0,545000%
v (f/d) 0,998350741
a (i:n) 35,15037907
100vn 90,4215217
Price $ 148,920

The total for the equally weighted porfolio is $108.683

101.388+108.011+ 97.309+105.402+91.338+148.920
=108.683
6

(b) The selling price for each instruments are:

 Treasury bonds 151: $100.453 (increase)

Treasury bonds 151 Explain

Coupon 2,00%
Maturity 21/12/2021
Yield 1,783%
Settlement
Date 31/08/2021
Next Coupon 21/12/2021
Last coupon 21/06/2021
From 31/08/2021 to
f 112 21/12/2021 = 30+31+30+21
From 21/06/2021 to
d 183 21/12/2021
g 1
c 1
n 0 No coupon left
i 1,783000%
v (f/d) 0,994582729
a (i:n) 0
100vn 100
$
Price 100,453

 Treasury bonds 137: $104.858 (increase)

Treasury bonds 137

Coupon 2,75%
Maturity 21/04/2024
Yield 1,256%
Settlement Date 31/08/2021
Next Coupon 21/10/2021
Last coupon 21/04/2021
From 31/08/2021 to
f 51 21/10/2021 = 30+21
From 21/04/2021 to
d 183 21/10/2021
g 1,375
c 1,375
2 each year and 1 in
n 5 2024
i 1,256000%
v (f/d) 0,99825683
a (i:n) 4,907163201
100vn 96,91830151
Price $ 104,858

 Treasury bonds 164: $99.575 (decrease)

Treasury bonds 164 Explain
Coupon 0,50%
Maturity 21/09/2026
Yield 0,630%
Settlement Date 31/08/2021
Next Coupon 21/09/2021
Last coupon 21/03/2021
From 31/08/2021 to =
f 21 21
From 21/03/2021 to
d 184 21/09/2021
g 0,25
c 0,25
2 each year from
n 10 2022 to 2026
i 0,630000%
v (f/d) 0,999641119
a (i:n) 9,828910798
100vn 96,9038931
Price $ 99,575

 Treasury bonds 155: $106.576 (increase)

Treasury bonds 155 Explain

Coupon 2,50%
Maturity 21/05/2030
Yield 1,769%
Settlement Date 31/08/2021
Next Coupon 21/11/2021
Last coupon 21/05/2021
From 31/08/2021 to
f 82 21/11/2021=30+31+21
From 21/05/2021 to
d 184 21/11/2021
g 1,25
c 1,25
2 each year and 1 in 2030
n 17
i 1,769000%
v (f/d) 0,996083228
a (i:n) 15,71929175
100vn 86,09628645
Price $ 106,576

 Treasury bonds 163: $89.928 (decrease)

Treasury bonds 163 Explain
Coupon 1,00%
Maturity 21/11/2031
Yield 2,132%
Settlement Date 31/08/2021
Next Coupon 21/11/2021
Last coupon 21/05/2021
From 31/08/2021 to
21/11/2021=30+31+2
f 82 1
From 21/05/2021 to
d 184 21/11/2021
g 0,5
c 0,5
2 each year from
n 20 2022 to 2031
i 2,132000%
v (f/d) 0,995285638
a (i:n) 17,92619768
100vn 80,89067327
Price $ 89,928

 Treasury bonds 147: $115.027 (increase)

Treasury bonds 147

Coupon 3,25%
Maturity 21/06/2039
Yield 2,263%
Settlement Date 31/08/2021
Next Coupon 21/12/2021
Last coupon 21/06/2021
From 31/08/2021 to
21/12/2021=30+31+30+
f 112 21
From 21/06/2021 to
d 183 21/12/2021
g 1,625
c 1,625
2 each year and 1 in
n 35 2039
i 2,263000%
v (f/d) 0,993137513
a (i:n) 28,76817506
100vn 67,44880992
Price $ 115,027

The total selling price for the equally weighted profolio is $102.736
100.453+104.858+ 99.575+106.576+89.928+115.027
=102.736
6
(c) The holding period yield for each instrument with the reinvestment rate at
0.74% are:
P sell − P buy+ coupons recieved∧interest earned on the coupons 365
HPY = x
P buy days held
Days held = 364 (from 01/09/2020 to 31/08/2021)
 Treasury bonds 151:
Psell = 100.453
Pbuy = 101.388
Coupons received:
21/12/2020 = 1
21/06/2021 = 1
 Total = 1+1 = 2
Interest on Coupons:
21 Dec 2020 coupon earned interest for 253 days: 1*0.0074*(253/365) =
0.005129
21 June 2021 coupon earned interest for 71 days: 1*0.0074*(111/365) =
0.001439
 Total = 0.006569
( 100.453 −101.388 ) +2+0.006569 365
HPY = x = 1.060%
101.388 364
 Treasury bonds 137:
Psell = 104.858
Pbuy = 108.011
Coupons received:
21/10/2020 = 1.375
21/4/2021 = 1.375
 Total = 2.75
Interest on coupons:
21 Oct 2020 coupon earned interest for 314 days: 1.375 * 0.0074 * (314/365)
= 0.008753
21 Apr 2020 coupon earned interest for 132 days: 1.375 * 0.0074 * (132/365)
= 0.003680
 Total = 0.012433
 ( 104.858 −108.011 )+2.75+ 0.012433 365
HPY = x = -0.363%
108.011 364

 Treasury bonds 164:

Pbuy = 97.039
Psell = 99.575
Coupons received:
21/9/2020 = 0.25
21/3/2021 = 0.25
 Total = 0.50
Interest on coupons:
21 Sep 2020 coupon earned interest for 344 days: 0.25 * 0.0074 * (344/365) =
0.001744
21 Mar 2020 coupon earned interest for 163 days: 0.25 * 0.0074 * (163/365) =
0.000826
 Total = 0.002570
( 99.575 − 97.039 ) +0.50+0.002570 365
HPY = x = 3.140%
97.039 364

 Treasury bonds 155:

Pbuy = 105.402
Psell = 106.576
Coupons received:
21/11/2020 = 1.25
21/5/2021 = 1.25
 Total = 2.50
Interest on coupons:
21 Nov 2020 coupon earned interest for 283 days: 1.25 * 0.0074 * (283/365) =
0.007172
21 May 2020 coupon earned interest for 102 days: 1.25 * 0.0074 * (102/365)
= 0.002585
 Total = 0.009757
 ( 106.576 −105.402 ) +2.50+0.009757 365
HPY = x = 3.505%
105.402 364

 Treasury bonds 163:

Pbuy = 91.338
Psell = 89.928
Coupons received:
21/11/2020 = 0.5
21/5/2021 = 0.5
 Total = 1
Interest on coupons:
21 Nov 2020 coupon earned interest for 283 days: 0.5 * 0.0074 * (283/365) =
0.002869
21 May 2020 coupon earned interest for 102 days: 0.5 * 0.0074 * (102/365) =
0.001034
 Total = 0.003903
( 89.928 − 91.338 ) +1+ 0.003903 365
HPY = x = -0.446%
91.338 364

 Treasury bonds 147:

Pbuy = 148.920
Psell = 115.027
Coupons received:
21/12/2020 = 1.625
21/6/2021 = 1.625
 Total = 3.25
Interest on coupons:
21 Dec 2020 coupon earned interest for 253 days: 1.625 * 0.0074 * (253/365)
= 0.008335
21 June 2020 coupon earned interest for 71 days: 1.625 * 0.0074 * (71/365) =
0.002339
 Total = 0.010674
 ( 115.027 − 148.920 ) +3.25+0.010674 365
HPY = x = -20.626%
148.920 364
Overall:
- The total coupons received for all instruments = 12
- The total Interest on all coupons of the instruments = 0.045905
(d) The holding period yield for the porfolio as a whole over the same period
is:
The total selling price of all instruments = $652.099
The total buying price of all instruments = $616.417
The total coupons received for all instruments = 12 (2 for each bonds)
The total Interest on all coupons of the instruments = 0.045905
Days held = 364
( 616.417 − 652.099 )+ 12+ 0.045905 365
HPY = x = -3.634%
652.099 364
-> The HPY for the porfolio as a whole is -3.634%.
As the total selling price is lower than the total buying price among all the
instruments, the holding period yield is shown as negative -3.634%, which means
the porfolio not a good performance due to the capital losses as $35.682.
 (e) The duration and convexity for the 3.25% 21 st June 2039 Treasury Bond 147
on the 21st June 2021, if the yield for that day is 1.685% (table format)
yield 1,685%
Cash Weight x
Time flow PV (Cf) PV(Cf)/Price weight x t (t+t2)/(1+yield)2 (t+t2)/(1+r)2
1 1,625 1,611423755 0,012973186 0,012973186 1,934266052 0,025093594
2 1,625 1,597960934 0,0128648 0,025729601 5,802798157 0,07465184
3 1,625 1,58461059 0,01275732 0,03827196 11,60559631 0,148056305
4 1,625 1,571371783 0,012650737 0,05060295 19,34266052 0,244698921
5 1,625 1,55824358 0,012545045 0,062725227 29,01399079 0,363981834
6 1,625 1,545225059 0,012440236 0,074641419 40,6195871 0,50531727
7 1,625 1,532315303 0,012336303 0,086354122 54,15944947 0,668127387
8 1,625 1,519513402 0,012233238 0,097865905 69,63357789 0,851844139
9 1,625 1,506818457 0,012131034 0,109179307 87,04197236 1,055909139
10 1,625 1,494229573 0,012029684 0,120296841 106,3846329 1,279773522
11 1,625 1,481745864 0,011929181 0,131220988 127,6615595 1,522897813
12 1,625 1,469366451 0,011829517 0,141954204 150,8727521 1,78475179
13 1,625 1,457090464 0,011730686 0,152498918 176,0182108 2,064814361
14 1,625 1,444917038 0,011632681 0,162857529 203,0979355 2,362573427
15 1,625 1,432845316 0,011535494 0,173032412 232,1119263 2,677525763
16 1,625 1,420874449 0,01143912 0,183025913 263,0601831 3,009176882
17 1,625 1,409003594 0,01134355 0,192840352 295,942706 3,357040923
18 1,625 1,397231915 0,011248779 0,202478025 330,759495 3,720640517
19 1,625 1,385558584 0,0111548 0,2119412 367,51055 4,099506676
20 1,625 1,373982779 0,011061606 0,221232119 406,195871 4,493178664
21 1,625 1,362503686 0,010969191 0,230353001 446,8154581 4,901203888
22 1,625 1,351120495 0,010877547 0,239306038 489,3693113 5,323137774
23 1,625 1,339832407 0,010786669 0,248093398 533,8574305 5,75854366
24 1,625 1,328638627 0,010696551 0,256717225 580,2798157 6,206992674
25 1,625 1,317538366 0,010607186 0,265179638 628,636467 6,668063627
26 1,625 1,306530844 0,010518567 0,273482731 678,9273844 7,141342903
27 1,625 1,295615285 0,010430688 0,281628577 731,1525678 7,626424348
28 1,625 1,284790922 0,010343544 0,289619223 785,3120173 8,12290916
29 1,625 1,274056991 0,010257127 0,297456694 841,4057328 8,630405788
30 1,625 1,263412739 0,010171433 0,305142992 899,4337144 9,148529824
31 1,625 1,252857415 0,010086455 0,312680095 959,395962 9,676903897
32 1,625 1,242390277 0,010002186 0,320069961 1021,292476 10,21515757
33 1,625 1,232010588 0,009918622 0,327314522 1085,123255 10,76292726
34 1,625 1,221717617 0,009835756 0,334415692 1150,888301 11,3198561
35 1,625 1,21151064 0,009753582 0,34137536 1218,587613 11,88559385
36 101,625 75,1330159 0,604877898 21,77560434 1288,221191 779,2165266
Price 124,2118717 28,55016167 936,9140797
Convexity 234,2285199

Duration 14,27508083
Modified
Duration 14,15581807
(f) The duration for all the bonds as at 31st August 2021 (Excel + duration
formula)
Treasury bonds 151 Treasury bonds 155
Settlement 31/08/2021 Settlement 31/08/2021
Maturity 21/12/2021 Maturity 21/05/2030
Coupon 2,00% Coupon 2,50%
Yield 1,783% Yield 1,769%
Freq (anually) 2 Freq (anually) 2
Duration using the duration Duration using the duration
function function
Duration 0,305556 Duration 7,868942
modify duration 0,302856 modify duration 7,799951

Treasury bonds 137 Treasury bonds 163

Settlement 31/08/2021 Settlement 31/08/2021
Maturity 21/04/2024 Maturity 21/11/2031
Coupon 2,75% Coupon 1,00%
Yield 1,256% Yield 2,132%
Freq (anually) 2 Freq (anually) 2
Duration using the duration Duration using the duration
function function
Duration 2,541526 Duration 9,678210
modify duration 2,525665 modify duration 9,576128

Treasury bonds 164 Treasury bonds 147

Settlement 31/08/2021 Settlement 31/08/2021
Maturity 21/09/2026 Maturity 21/06/2039
Coupon 0,50% Coupon 3,25%
Yield 0,630% Yield 2,263%
Freq (anually) 2 Freq (anually) 2
Duration using the duration Duration using the duration
function function
Duration 4,987183 Duration 13,898235
modify duration 4,971523 modify duration 13,742736

(g) What is the duration for the porfolio?

Total duration for all instruments is:
0.305556 + 2.541526 + 4.987183 + 7.868942 + 9.678210 +13.898235 = 39.279651
39.279651
Total duration for the porfolio (equally weighted) is: = 6.545508
6
(h) If the porfolio had 60-day Bank Accepted bill with the yield as 0.931%, what
would be the bill’s duration? Explain your answer.
The bill duration is two months because 60 days is equivalent to two months
(i) Comparing the two sets of rates, what can you say about the term
structure?

The yield comparison between

1 Sep 2020 and 31 Aug 2021
2.5

1.5

0.5

0
44551 45403 46286 47624 48173 50942
1st September 2020 31st August 2021

As indicated by the line chart, the instrument's yields for the settlement date of 1
September 2020 demonstrated a falling trend, whilst the instrument's yields for the
settlement date of 31 August 2021 revealed a growing tendency in the future.