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FRM Part I · FRM Exam Part I · Futures Markets

A Treasury bond futures contract has a settlement price of 120-00 (quoted as 120.00 per 100 face value). The short delivers a bond with a conversion factor of 0.9000. Accrued interest on the bond at delivery is 1.50 per 100 face value. The contract size is 100,000 face value. What is the cash amount the long pays?

The long pays $109,500. The invoice is the futures price times the conversion factor plus accrued interest: 120 × 0.9 = 108, plus 1.5 gives 109.5 per 100 face value, which is $109,500 on a 100,000 face contract.

  1. A$108,000
  2. B$109,500Correct
  3. C$121,500
  4. D$120,000

Explanation

Cash received by short = futures price x conversion factor + accrued interest = 120 x 0.9 + 1.5 = 108 + 1.5 = 109.5 per 100 face. For 100,000 face, this is $109,500. Omitting accrued interest gives $108,000; ignoring the conversion factor gives $121,500 or $120,000.

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