Q1. Could someone explain me what just transpired here?
If not mentioned should we assume they want an unadjusted futures price? If yes, why computed a quoted futures price with having to divide by conversion factor first, and then again multiply by it?
Why are we adding Accrued interest at expiration? Aren’t we supposed to subtract it?
Anyone?
Please help
I think anything related to bond futures, it’s implied that they’re asking for the quoted future prices (i.e., after dividing by the conversion factor)
Quoted price = Full price - accrued interest
Therefore, to get to our starting point (full price to carry forward to the futures expiry date) we have to add back the accrued interest
If you see the solution, you would see that they added accrued interest to the current future price, and then removed it from the future value (after multiply with the risk free rate at one month).
To my understanding, we value all the bonds (with different maturities and YTM) using the same constant risk free rate. Therefore, the conversion factors is used to adjust the price accordingly.
AI must be subtracted because the clean price (quoted price) is used to quote bond price on exchanges
Err…No, they added accrued interest at time T to the adjusted price. Hence the question.