FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures
A Treasury bond futures settlement price is 110. The cheapest-to-deliver bond has conversion factor 1.0800. It pays a 6% annual coupon (face 100) and has accrued interest of 2.00 at delivery. What is the cash the short receives per 100 face value on delivery?
The short receives 120.80 per 100 face value. The invoice price is the futures settlement price of 110 multiplied by the 1.08 conversion factor, giving 118.80, plus 2.00 of accrued interest, for a total of 120.80.
- A120.80Correct
- B118.80
- C112.00
- D108.00
Explanation
Cash received = futures price x conversion factor + accrued interest = 110 x 1.08 + 2.00 = 118.80 + 2.00 = 120.80. Omitting accrued interest gives 118.80. Using 110 + 2 gives 112.00, ignoring the conversion factor.
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