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Hi David, isn't the answer should be B because

FV=100,N=20,1/Y=6/2,PMT=3.25, it gives us PV = 103.71

Conversion factor = 103.71/100 = 1.03

Here's the question from Hull 2011 Chapter 5&6.

171.3. The following four bonds can be delivered by the party with the short position in a U.S. Treasury bond futures contract:

Bond A: 15 year maturity and 5.0% semi-annual coupon Bond B: 20 year maturity and 6.5% semi-annual coupon Bond C: 25 year maturity and 6.0% semi-annual coupon Bond D: 30 year maturity and 5.5% semi-annual coupon

Which of these bonds has the HIGHEST conversion factor?

a) Bond A

b) Bond B

c) Bond C

d) Bond D

Answer listed in doc -

171.3. D. Bond D We can approximate the CF by pricing the bonds with a yield of 6.0%; e.g, Price of Bond A = -PV(6%/2, 30 periods, $2.5 s.a. coupon, $100 FV) = $87.74 so the CF is approximately $87.74/100 ~= 0.88.

As the coupons of Bonds A & B are below 6.0%, their CF must be less than zero. The CF of Bond C will be nearly 1.0 Only the CF of Bond D will be above 1.0; approximately 1.07 (as price at 6% ~ $107)

Regards,

atandon

FV=100,N=20,1/Y=6/2,PMT=3.25, it gives us PV = 103.71

Conversion factor = 103.71/100 = 1.03

Here's the question from Hull 2011 Chapter 5&6.

171.3. The following four bonds can be delivered by the party with the short position in a U.S. Treasury bond futures contract:

Bond A: 15 year maturity and 5.0% semi-annual coupon Bond B: 20 year maturity and 6.5% semi-annual coupon Bond C: 25 year maturity and 6.0% semi-annual coupon Bond D: 30 year maturity and 5.5% semi-annual coupon

Which of these bonds has the HIGHEST conversion factor?

a) Bond A

b) Bond B

c) Bond C

d) Bond D

Answer listed in doc -

171.3. D. Bond D We can approximate the CF by pricing the bonds with a yield of 6.0%; e.g, Price of Bond A = -PV(6%/2, 30 periods, $2.5 s.a. coupon, $100 FV) = $87.74 so the CF is approximately $87.74/100 ~= 0.88.

As the coupons of Bonds A & B are below 6.0%, their CF must be less than zero. The CF of Bond C will be nearly 1.0 Only the CF of Bond D will be above 1.0; approximately 1.07 (as price at 6% ~ $107)

Regards,

atandon

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