FMP

Aegis.Sameerdutta
Posts: 8
Joined: Mon May 09, 2016 10:39 am

FMP

Postby Aegis.Sameerdutta » Mon Oct 24, 2016 9:58 am

Can you please advise on why we have used 365 as denominator in some places in SOLUTION as I am a bit confused? snapshot (...coupon is = 4*exp(-0.04*130/365) = 3.94. Fo = (101.11-3.94)*exp(0.04*180/365) =)


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


Incorrect

Marks for this submission: 0/1.

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: FMP

Postby edupristine » Mon Oct 24, 2016 12:32 pm

Hi Aegis

As we know that A day-count convention is a system used in the bond markets to determine the number of days between two coupon dates. This system is important to traders of various bonds because it affects how the accrued interest and present value of future coupons is calculated.
Actual/365 is used when pricing U.S. government Treasury bonds.

Aegis.Sameerdutta
Posts: 8
Joined: Mon May 09, 2016 10:39 am

Re: FMP

Postby Aegis.Sameerdutta » Mon Oct 24, 2016 1:01 pm

Team thanks for the reply, the only confusion is why 365 and not 180. Please help

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: FMP

Postby edupristine » Tue Oct 25, 2016 4:54 am

Hi Aegis
Here Actual day between two coupon bond is 180 days, so we use Actual/365.


Return to “FRM Part I”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.