Explanation:
The conversion factor is based on pricing the bond as if it yielded 6% annually with semiannual compounding, i.e. 3% per half-year. A 9% coupon bond has coupons of 4.5 per $100 par every half-year.
At a 3% half-year discount rate, the bond price is approximately:
So the price is about 129.4, which corresponds to a conversion factor of approximately 1.2940.
Therefore, the nearest answer is D.
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Q-720.1. The Treasury bond futures contract allows the party with the short position to choose to deliver any bond that has a maturity between 15 and 25 years. Assume a certain bond that is valid for delivery matures in 15 years and two months (15.1667 years) and has a coupon rate of 9.0% payable semi-annually. Which is nearest the bond's conversion factor (CF)?
A
0.8530
B
1.0420
C
1.1380
D
1.2940