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Answer: Bond C
## Explanation To determine the cheapest-to-deliver (CTD) bond, we need to calculate the implied repo rate for each bond and select the bond with the highest implied repo rate. However, since we don't have time to delivery information, we can use the cost of delivery approach: **Cost of Delivery = Spot Price - (Futures Price × Conversion Factor)** Convert futures price to decimal: 103-17/32 = 103 + 17/32 = 103.53125 **Bond A:** Spot price = 102-14/32 = 102 + 14/32 = 102.4375 Cost = 102.4375 - (103.53125 × 0.98) = 102.4375 - 101.460625 = 0.976875 **Bond B:** Spot price = 106-19/32 = 106 + 19/32 = 106.59375 Cost = 106.59375 - (103.53125 × 1.03) = 106.59375 - 106.6371875 = -0.0434375 **Bond C:** Spot price = 98-12/32 = 98 + 12/32 = 98.375 Cost = 98.375 - (103.53125 × 0.952) = 98.375 - 98.56175 = -0.18675 Since we have a short position, we want to deliver the bond with the **lowest cost** (most negative). Bond C has the lowest cost (-0.18675), making it the cheapest to deliver. **Answer: C (Bond 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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