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Answer: Bond B is the CTD because it costs the short $545 per contract to deliver
Compute the invoice price for each bond using the futures settlement price multiplied by the conversion factor: \[ \text{Invoice Price} = \text{Futures Price} \times \text{CF} \] Using the futures settlement price of **98.50**: - **Bond A**: \[ 98.50 \times 0.96 = 94.56 \] Cost/profit to the short: \[ 97.00 - 94.56 = 2.44 \] So Bond A costs the short about **$2,440** per contract. - **Bond B**: \[ 98.50 \times 1.03 = 101.455 \] Cost/profit to the short: \[ 102.00 - 101.455 = 0.545 \] So Bond B costs the short about **$545** per contract. Because Bond B has the lower delivery cost, it is the **cheapest-to-deliver (CTD)** bond.
Author: Manit Arora
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$98.50 (98-16). The two bonds eligible for delivery are:$97.00 and conversion factor (CF) of 0.96;$102.00 and conversion factor (CF) of 1.03Which bond is cheapest-to-deliver (CTD)?
A
Bond A is the CTD because it cost the short $2,440 per contract to deliver
B
Bond A is the CTD because it profits the short $5,500 per contract to deliver
C
Bond B is the CTD because it costs the short $545 per contract to deliver
D
Bond B is the CTD because it profits the short $1,316 per contract to deliver
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