Explanation:
The cheapest to deliver (CTD) bond is determined by the formula: QBP - (QFP × CF), where:
Let's calculate for each bond:
Convert prices to decimal format:
Calculate QBP - (QFP × CF):
The CTD is the bond with the minimum value of QBP - (QFP × CF).
Results:
Bond C has the smallest value (-0.18675), making it the cheapest to deliver bond.
Answer: C
Ultimate access to all questions.
The yield curve is upward sloping. You have a short T-bond futures position. The following bonds are eligible for delivery:
| Bond | A | B | C |
|---|---|---|---|
| Spot price | 102-14/32 | 106-19/32 | 98-12/32 |
| Coupon | 4% | 5% | 3% |
| Conversion factor | 0.98 | 1.03 | 0.952 |
The futures price is 103-17/32 and the maturity date of the contract is September 1. The bonds pay their coupon semiannually on June 30 and December 31. The cheapest to deliver bond is:
A
Bond A
B
Bond B
C
Bond C
D
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