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FINC6001 Assignment: AMD financial analysis and Bond pricing
Semester 2, 2024
Group Project
Weighting: 100 points (worth 30% of the total unit)
Assessment Due Date: 11 Oct. 2024 at 23.59pm
I. INTRODUCTION AND GUIDELINES
The FINC6001 assignment is a group project centered on harvesting the intelligence of AI to assist in finding causes for differences in hypothetical and real financial prices, using AMD as a case study. Teams will conduct financial analysis examining financial ratios, market trends, and ESG factors. The next task is pricing a corporate bond issued in 2022, and using data collected from the US Department of the Treasury. The calculated price will have errors from the actual market price and your group is to engage generative AI via the "Cogniti" tool to discuss reasons of why there is a price difference. You will be asked to document all correspondence with Cogniti and attach the history of conversation as an appendix. The deliverable is a comprehensive report, blending numerical analysis and critical insights.
· The written report should be no more than 3,000 words with normal-sized margins, 1.5 line spacing and size 12 Arial Font. Please number the pages of your report.
· All assignments must include a list of references in academic form using the APA 7th method.
· The report must be submitted as a .docx document. The Excel spreadsheet must be submitted as a .xlsx workbook. The Excel spreadsheet should contain all the calculations used to generate the values in your report. The Excel spreadsheet will not be explicitly graded but must be submitted at the same time as the report to verify your calculations.
· The group representative must submit three files electronically. Failure to submit both files will result in penalties - late penalties will apply until both files are submitted. They also need to ensure that all files submitted can be opened and read in Canvas. Canvas does not allow two files to be submitted simultaneously so please submit the Excel sheet first then make a submission of the engagement history of Cogniti. Finally, submit the report as the last submission.
II. REPORT STRUCTURE
Your report must contain the following information:
1. Company overview
2. Financial Analysis
3. Market trends and ESG factors
4. Bond pricing
5. Explaining errors in bond pricing
6. Reflection
7. References
Note: Remember that all calculations conducted in requirements should be provided in excel form and submitted.
III. BACKGROUND AND REQUIREMENTS
You are required to complete the followings tasks:
1. Company overview
Provide a succinct overview of AMD, covering its evolution, core business areas, and the Strength, Weakness, Opportunities, and Threats the company faces.
2. Financial Analysis
Conduct a comprehensive traditional financial analysis on AMD, report on financial ratios and value of equity.
3. Market trends and ESG factors
AMD is not the sole producer of semiconductors in the US and it also creates semiconductors used in various industries. Present an in-depth market analysis of AMD and how it compares to the key competitors in the industry now and in the near future. Also, consider what ESG factors could be of interest to stakeholders, and which could potentially have a positive or negative impact on the equity prices.
4. Bond pricing
AMD issued a 10 year corporate bond worth 500 million US dollars on 6/Sep/2022. The ISIN of the bond is US007903BF39. The first coupon payment made was on 1/12/2022 and last scheduled coupon payment is on 1/6/2032 (maturity date). The bond had a semi-annual interest payment agreement with a coupon rate of 3.924% and a minimum tradeable unit of 2,000 US dollars. You are asked to price this bond at the date of 30/Sep/2024.
You are allowed to engage with Cogniti to find how to calculate the price of bonds. Here is an example.
User: how can a 10 year corporate bond with semiannual payments be priced?
AI: Pricing a 10-year corporate bond with semiannual payments involves calculating the present value of all future cash flows (coupon payments and principal repayment) and summing them up. Here’s a step-by-step guide on how to do this:
### 1. Identify the bond details:
- **Face value (F)**: The principal amount of the bond, typically $1,000.
- **Coupon rate (C)**: The annual interest rate paid by the bond, expressed as a percentage of the face value.
- **Yield to maturity (YTM)**: The total return anticipated on the bond if held until it matures.
### 2. Calculate the coupon payment:
The coupon payment is typically paid semiannually, so you will need to adjust the coupon rate for half-year periods.
\[ \text{Semiannual coupon payment} = \frac{C \times F}{2} \]
### 3. Determine the number of payments:
Since the bond matures in 10 years and payments are made semiannually, there will be a total of:
\[ \text{Number of payments (n)} = 10 \times 2 = 20 \]
### 4. Discount each coupon payment and the face value:
Each future cash flow needs to be discounted back to its present value (PV). The formula for the present value of a future cash flow is:
\[ \text{PV} = \frac{\text{Cash flow}}{(1 + r)^t} \]
Where:
- \( r \) = semiannual YTM (YTM/2)
- \( t \) = period number
### 5. Calculate the present value of all coupon payments:
Sum the present values of all individual future coupon payments:
\[ \text{PV of coupons} = \sum_{t=1}^{20} \frac{\text{Semiannual coupon payment}}{(1 + r)^t} \]
### 6. Calculate the present value of the face value:
The face value is paid at maturity, so its present value is calculated as:
\[ \text{PV of face value} = \frac{F}{(1 + r)^{20}} \]
### 7. Sum all present values:
The price of the bond is the sum of the present value of all the coupon payments and the present value of the face value:
\[ \text{Bond price} = \text{PV of coupons} + \text{PV of face value} \]
### Example Calculation:
Assume:
- Face value, \( F = \$1000 \)
- Annual coupon rate, \( C = 5\% \)
- Yield to maturity, \( YTM = 4\% \)
**Step 1:** Semiannual coupon payment:
\[ \frac{5\% \times \$1000}{2} = \$25 \]
**Step 2:** Semiannual YTM:
\[ \frac{4\%}{2} = 2\% = 0.02 \]
**Step 3:** Calculate PV of each type of cash flow:
- **Coupons:** Use an annuity formula or calculate each:
\[ \text{PV of coupons} = \sum_{t=1}^{20} \frac{\$25}{(1 + 0.02)^t} \]
- **Face value:**
\[ \text{PV of face value} = \frac{\$1000}{(1 + 0.02)^{20}} \]
**Step 4:** Sum:
\[ \text{Bond price} = \text{PV of coupons} + \text{PV of face value} \]
This methodology will give you the current market price of the bond, reflecting the present value of expected future cash flows based on the YTM.
You can see that the output is only providing you the basic methodology of pricing a bond. To actually calculate, you will need to collect further information of the bond and also the right discount factors. Please use the Interest Rate Statistics from the US Department of the Treasury as a source for acceptable discount rates. Some discount factors will need to be further inferred from the Par Yield Curve. State what assumptions you have put in place when making such inferences.
5. Explaining errors in bond pricing
The key aspect of this section is to improve your understanding of pricing corporate bonds while engaging with Gen AI as a tool to assist your understanding.
Once you create the calculated bond price in section 4, you will be asked to compare the actual trading price of 30/Sep/2024 with your calculated price. There is no deduction in marks for having a difference in the price between your calculation and the actual. In this section you will be asked to discuss with Cogniti, what could be the reasons for the pricing error. (note: if you did not have a pricing error, then again, discuss with Cogniti on why you did not get errors even though you made assumptions in section 4.)
Save the history of engagement with Cogniti and submit it as a separate MS word document submission.
6. Reflection
Reflect on the process of using Cogniti as AI-generated advice with your report in sections 1 to 5. Discuss the insights gained, challenges encountered, and the potential implications of AI's role in assisting your studies.
7. References
Add a list of references you used for the report. This section is not included in the word count.