About the conversion factor in the bond futures trading

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Reference no: EM131874138

Interest Futures. There are two kinds: one is the futures on bonds, and the other is on the interest rate.

Today is October 17, 2017 and you are buying a 6% semiannual bond maturing on March 21, 2028. Assuming that the yield to maturity on the bond is 5.25%, compute both the quoted, clean; and dirty or invoice or cash price. You should use your bond calculator.

Discuss why we need to learn about the conversion factor in the bond futures trading.

Compute the fair price of the December 2017 futures contract on an 8% semiannual bond maturing in 15 years. Assume that the interest rate is 4%.

Suppose that you intend to invest $10 million on December 21, 2017 for a period of three months until March 21, 2018. In order to hedge, you have decided to buy three-month Eurodollar futures contract. Today the Eurodollar futures is selling at 96.875 but the 3-month Eurodollar deposit rate will turn out to be 97.125. How much do you think you will make on futures, and how much will you make by March 21, 2018?

Will the forward rate be same as the futures rate as implied in the Eurodollar futures prices? Why or why not.

Suppose that the spot rate of interest on 6-month bonds is 1.25% and that the one-year Eurodollar futures maturing in 6 months is selling for 96.50. Compute the implied spot interest rate on 1 ½ year bond.

Similarly, why do we need to know about the cheapest-to-deliver bonds?

Reference no: EM131874138

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