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Answer: Bond C
## Explanation The cheapest to deliver (CTD) bond is determined by the formula: **QBP - (QFP × CF)**, where: - QBP = Quoted Bond Price (spot price) - QFP = Quoted Futures Price - CF = Conversion Factor Let's calculate for each bond: **Convert prices to decimal format:** - Futures price: 103-17/32 = 103 + 17/32 = 103.53125 - Bond A spot: 102-14/32 = 102 + 14/32 = 102.4375 - Bond B spot: 106-19/32 = 106 + 19/32 = 106.59375 - Bond C spot: 98-12/32 = 98 + 12/32 = 98.375 **Calculate QBP - (QFP × CF):** - **Bond A:** 102.4375 - (103.53125 × 0.98) = 102.4375 - 101.460625 = 0.976875 - **Bond B:** 106.59375 - (103.53125 × 1.03) = 106.59375 - 106.6371875 = -0.0434375 - **Bond C:** 98.375 - (103.53125 × 0.952) = 98.375 - 98.56175 = -0.18675 The CTD is the bond with the **minimum** value of QBP - (QFP × CF). **Results:** - Bond A: 0.976875 - Bond B: -0.0434375 - Bond C: -0.18675 Bond C has the smallest value (-0.18675), making it the cheapest to deliver bond. **Answer: C**
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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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