Cheapest-to-Deliver Bond (11 marks)
Today is July 1. You hold a November Treasury bond futures contract with a price of 92:15 (i.e., 92 plus [15/32]), with a delivery date of November 15 in the same year. You have identified the two bonds below that could be used for delivery against the futures contract:
|Bond A||Bond B|
|Maturity||26.5 years||31 years|
|Coupon dates||April 15, October 15||June 15, December 15|
Assume that the next year is not a leap year, and that the market repo rate is 5.50%.
a. Find the conversion factors for Bond A and Bond B. Use the downloadable Excel spreadsheet on the Chicago Mercantile Exchange (CME) website: http://www.cmegroup.com/trading/interest-rates/us-treasury-futures-conversion-factor-lookup-tables.html.
b. Identify the cheapest-to-deliver bond.
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