mock test 1

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mock test 1

Postby madhuri1682 » Sat Nov 10, 2012 2:55 pm

Suppose that in a Treasury bond futures contract, it is known that the cheapest-to-deliver bond will be a 14% coupon bond with a conversion factor of 1.345. Suppose also that it is known that delivery will take place in 270 days. Coupons are payable semi-annually on the bond. The last coupon date was 45 days ago, the next coupon date is in 137 days, and the coupon date thereafter is in 320 days. The term structure is flat and the rate of interest (with continuous compounding) is 10% per annum. Assume that the current quoted bond price is $110. Then what would be the quoted futures bond price?
Choose one answer.
a. $85.67
b. $80.27
c. $79.13
d. $82.49
The correct answer is $80.27.


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Re: mock test 1

Postby AMITAG1990 » Sat Nov 10, 2012 5:24 pm

Hii Madhuri..

this is a quetion of cheapest to deliver bond.For finding the value of Quoted future price, first find out value of cash spot price by adding the accrued interest and then take it to future value and less accrued interest and then divide by setttlement price.

Cash spot price = 110+(45/182)(7) = 111.73

Now less the price of coupon to be received after 137 days
=111.73- (137/182)*7*e^-0.1*137/365=104.988
Now take this value to future. i.e after 270 days= 104.988 + e^0.1*270/365 = 113.05

Now Convert this cash future price in to quoted future price by minus the accrued int. and then divide it by settlement price.
= (113.05 - 7*133/183)/1.345 = 80.27

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Re: mock test 1

Postby content.pristine » Mon Nov 12, 2012 1:02 pm

Awesome Explanation Amit!

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