About the price of Treasuray Bond Futures Contract

CFA Level I
#1

Hi, I’m a bit confused of the price of Treasuray Bond Futures contract. The books says US Treasury bond futures contract covers $100,000 par value of US Treasury bonds. Prices are quoted in points and 32nds. For example, if the quote is 98 and 18/32 which equals 98.5625, the T-bond contract price will be $98,562.50. My question is: Why it only times 1,000 not 100,000??? Thanks, -Hui

#2

Because you get $100,000 par value of bonds which most people would pay around $100,000 for? BTW - Above isn’t really true unless the cheapest to deliver bond has a conversion factor of 1.

#3

Just think of it as 98.5625% of par…

#4

Thx. I got a better explanations from Wikipedia. In the U.S. bond markets, par value is when the price dollars is equal to the face value. A Treasury note is denominated in units of $1,000, but has its price quoted by common convention in terms of moving the decimal point to the left by one position. A Treasury note selling at par value would thus be quoted as 100:00, where the two digits to the right of the colon are priced in thirty-seconds (1/32) of a dollar (0.03125 dollars.) A par value price of 100:00 would thus equate to a price of a note or bond selling at face value of $1000 per Treasury note. A price of 75:31, on the other hand, would thus equate to a note or bond quoted at a price of (75 + 31/32) x 10, or $759.6875, selling at an obvious discount from its par value of 100:00 for a face value paid upon maturity of the note or bond of $1,000. Well, if a treasury note is denominated in units of $1,000, is US treasury bond futures contract denominated in units of $100,000??? Pls help to clarify.

#5

If corn is denominated in ears, how come a futures contract is for 40,000 bushels?

#6

Because the price is quoted with a base of 100. For example, if the contract was selling at par, the price would be 100. 100 x 1,000 = 100,000. Thus, a price of 98.5625 would follow the same logic - 98.5625 x 1,000 = 98,562.50. -Stillwagon

#7

Are T-bond futures on L1? In fact, none of that is right. A T-bond futures is a deliverable contract for which you deliver $100,000 par value of bonds. The invoice price for the bonds is the futures price * conversion factor published by the exchange. Because of the way they calculate the conversion factors (and other stuff) one bond is the cheapest to deliver bond. That means the notional size of the futures contract is really futures price * conversion factor for the CTD bond which can be decidedly different from $100,000.

#8

Thx, guys. So what’s the par value of a bond and what’s the par value of a bond futures? -H.

#9

Thanks, JoeyDVivre. I certainly liked your sense of humor - “If corn is denominated in ears, how come a futures contract is for 40,000 bushels?” LOL Just so you know I read Volume 6 first, this book does not cover the content of the bond convertion factor or CTD (cheapest-to-delivery) bond etc. Maybe that’s why I did not thoroughly understand how are the bonds and bond futures priced. So for now, maybe I’ll just have to remember the futures contract price equals quote x 1000.