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Answer: An environment where bond yields are less than 6% favors high-coupon, short-maturity bonds.
## Explanation **C is correct** because in interest rate environments where bond yields are less than 6%, high-coupon, short-maturity bonds tend to be the cheapest to deliver into Treasury bond futures contracts. ### Detailed Analysis: **Why C is correct:** - When yields are below 6%, high-coupon bonds have higher present values and are more likely to be the cheapest to deliver - Short-maturity bonds benefit from the yield curve shape in low-yield environments - This combination provides the most favorable delivery economics for futures contract settlement **Why other options are incorrect:** - **A is incorrect**: An upward sloping yield curve actually favors **long-maturity** bonds, not short-maturity bonds - **B is incorrect**: When yields are greater than 6%, the market favors **low-coupon, long-maturity** bonds, not high-coupon bonds - **D is incorrect**: A downward sloping yield curve favors **short-maturity** bonds, not long-maturity bonds ### Key Concepts: - **Cheapest-to-deliver (CTD)** bonds are determined by the relationship between cash bond prices and futures prices - Yield curve shape and absolute yield levels significantly impact which bonds become CTD - High-coupon bonds become more attractive for delivery when yields are low due to their higher present values
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An analyst on the fixed-income derivatives desk at an investment bank is examining the method of determining the cheapest-to-deliver US Treasury bond when delivering into a short position in a Treasury bond futures contract. The analyst is focusing on the impact of the level and shape of the yield curve on determining which types of bonds are most likely the cheapest-to-deliver. Which of the following statements most likely to correctly describe the analyst's findings?
A
An upward sloping yield curve favors low-coupon, short-maturity bonds.
B
An environment where bond yields are greater than 6% favors high-coupon, long-maturity bonds.
C
An environment where bond yields are less than 6% favors high-coupon, short-maturity bonds.
D
A downward sloping yield curve favors low-coupon, long-maturity bonds.