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FINM2001
I have received inquiries about the monthly returns of eTB (GSBG33.AX). Below is a graph of monthly
returns for 1/2016-9/2023. If you take the five-year average, you will find a negative monthly return
of around -0.11%. Thank you for the students pointed this out to me.
So why is this happening? The past five
years have been economically (and
socially) turbulent, and the RBA's policy
has responded to the economic
environment. The first phase has been
lowering the RBA cash rate during the
pandemic, where the RBA lowered its rate
as low as 0.10% p.a. The second phase is
after 2022, when 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? At least for the negative returns, you could
adjust for coupons. Since the coupon is 4.5% p.a., you may add 0.37% per month
{=(1+0.045)^(1/12)-1} to the average return that you computed using prices, which should give you a
positive number.
(You may also read the survey of market risk premium and the HBR article on cost of capital to
enrich your discussion.)