Answer-first summary for fast verification
Answer: a) Bond #1
To identify the cheapest-to-deliver bond, compare the **net delivery cost** for each bond: \[ \text{Net cost} = \text{Bond price} - (\text{Futures price} \times \text{CF}) \] Using the settlement price of 99.00: - Bond #1: \(75.26 - 99 \times 0.7600 = 75.26 - 75.24 = 0.02\) - Bond #2: \(36.18 - 99 \times 0.3600 = 36.18 - 35.64 = 0.54\) - Bond #3: \(110.51 - 99 \times 1.1000 = 110.51 - 108.90 = 1.61\) - Bond #4: \(129.41 - 99 \times 1.2900 = 129.41 - 127.71 = 1.70\) The smallest net cost is for **Bond #1**, so it is the **cheapest to deliver**. **Correct answer: A**
Author: Manit Arora
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720.2. The counterparty with the short position in a Treasury bond futures contract has decided to deliver and is trying to decide between the four bonds displayed below; e.g. the quoted price of bond #4 is $129.41 and its conversion factor (CF) is 1.290.
Futures settlement price $99.00
| Bond | Quoted Price | CF |
|---|---|---|
| #1 | $75.26 | 0.7600 |
| #2 | $36.18 | 0.3600 |
| #3 | $110.51 | 1.1000 |
| #4 | $129.41 | 1.2900 |
If the future contract's settlement price is $99.00, then which bond is cheapest to deliver (CTD)?
A
a) Bond #1
B
b) Bond #2
C
c) Bond #3
D
d) Bond #4
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