I was wondering if anyone could help with the following question?
The cheapest to deliver (CTD) bond underlying a futures contract is priced at 104.32 and has a maturity of 12 years, a coupon of 7% (paid semi-annually), and a conversion factor of 1.0213. Assume the relevant risk-free rate is 6.5% and the future value in one year of the coupons of the CTD is 7.12. The price of a Treasury bond future expiring in 12 months is closest to?
i assumed the calculation would be ((Price - benefit of carry)(cost of carry)) / conversion factor, or:
((104.32-7.12)(1.065))/1.0213 but the answer provided was:
Future price = CTD Future/Conversion factor. CTD future = (104.32 x 1.065) - 7.12 = 103.98 Future Price = 103.98/1.0213 = 101.8
can anyone explain why the BOC is taken out after the COC?
Thanks in advance
SL
