The most recent settlement T-bond futures price is 110. Which of the following four bonds is...
- The most recent settlement T-bond futures price is 110. Which of the following four bonds is cheapest to deliver (use the gross basis)?
- Quoted bond price = 123; conversion factor = 1.1000.
- Quoted bond price = 155; conversion factor = 1.4000.
- Quoted bond price = 145; conversion factor = 1.3000.
- Quoted bond price = 137; conversion factor = 1.2200.
Homework Answers
Cost of Delivering a Bond = Quoted Bond Price - [Recent Settlement Price * Conversion Factor]
Bond A's Cost of Delivering a Bond = 123 - [110 * 1.1000] = 123 - 121 = 2.00
Bond B's Cost of Delivering a Bond = 155 - [110 * 1.4000] = 155 - 154 = 1.00
Bond C's Cost of Delivering a Bond = 145 - [110 * 1.3000] = 145 - 143 = 2.00
Bond D's Cost of Delivering a Bond = 137 - [110 * 1.2200] = 137 - 134.2 = 2.80
So, the bond in B is therefore cheapest to deliver.
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