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Calculate the accrued interest for Bond X

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Question - An interest rate futures of Treasury Bond is currently trading at 140 or 140% of 100,000 par. One of the many bonds, Bond X , is eligible for delivery as follows:

Bond Coupon Rate Conversion Factor Full Price Today X 8% 1.2 150

Assume delivery date for the contract is 5 months from now. Also, the next semiannual coupon interest payment will occur six month from today (1 months after delivery). The current repo rate is 2% per year.

Required -

a) If the short seller buys the bonds today and sell it on delivery date at the locked-in futures price. Calculate the accrued interest for Bond X to be received by the short seller on delivery date. Show computation.

No coupon will be paid during holding period in this case, thus there will be no reinvestment income.

b) Calculate the return for cash and carry for Bond X.

c) Suppose the return for cash and carry is 1.8% per year. Should cash and carry be done with such bond today? Explain briefly why or why not.

Reference no: EM133035440

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