FMP

mayankmundhra30
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Joined: Sat Jun 25, 2016 8:13 am

FMP

Postby mayankmundhra30 » Thu Aug 25, 2016 5:35 am

Hi
I have the following doubts

1)Johnson has invested in a bond. It pays 8% semi- annual coupon. It has a quoted price of 100 and conversion factor of 1.2. There are 180 days between the coupons and last coupon was paid 50 days ago. Assume a treasury bond futures contract is to be delivered 180 days from today and the risk free rate is 4%. Calculate theoretical price for the T-bond futures contract
Choose one answer.
a. 97.99 Incorrect
b. 99.10 Incorrect
c. 97.17 Incorrect
d. 81.66 Correct
The correct answer is D
Accrued interest: 4*50/180 = 1.11. Cash price = 100+1.11=101.11. Next coupon will be received 130 days from today. Hence present value of next coupon is = 4*exp(-0.04*130/365) = 3.94. Fo = (101.11-3.94)*exp(0.04*180/365) = 99.10. Since the contract expires 50 days after the last coupon payment, the quoted futures price is calculated as, cash futures price – accrued interest = 99.10 – (4*50/180) = 97.99. Theoretical price = 97.99/1.2 = 81.66.

In the above sum could you please explain the part after calculating the Fo= 99.10.

2)If cash price on a 180 day T-bill is quoted as 97.5. The discount rate is closest to:
In this question do we need to find monthly, semi annual or annual discount rate.

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