Explanation:
The cash-carry amount is the net cash flow generated by holding the position, which equals the coupon income received minus the financing costs paid over the holding period. It does not include the capital gain or loss resulting from changes in interest rates.
Calculate Coupon Income:
The bond has a $5,000,000 face value and a coupon rate of 7.5% (7 1/2s).
Semi-annual coupon payment = $5,000,000 \times \frac{7.5%}{2} = $5,000,000 \times 3.75% = `$187`,500.
Calculate Financing Cost:
The bond trades at par, so the purchase price (and financing required) is $5,000,000.
The direct repo rate is 3% per annum.
Financing cost for 6 months = $5,000,000 \times \frac{3%}{2} = $5,000,000 \times 1.5% = `$75`,000.
Calculate Cash-Carry:
Cash-Carry = Coupon Income - Financing Cost
Cash-Carry = `187`,500 - \`75,000 = +\$112`,500.
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Q.18 An analyst at a bond trading desk wants to decompose the P&L of a $5,000,000 face value U.S. Treasury 7 1/2s of April 31, 2030, over a six-month holding period. Currently, the bond trades at par. The position is financed with direct repo which has an interest rate of 3%. If the market experiences a +100 basis-point parallel shift in the yield curve at the end of the sixth month, what is the cash-carry amount over the six-month period?
A
-$500,000
B
-$75,000
C
+$112,500
D
+$187,500
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