I am having a difficult time understanding the conversion factor regarding bond futures:
Time until expiration = 1.2 year
Coupon on the underlying bond = 7% annual
Quoted price = $1040
Conversion factor = 1.13
Annual risk free rate = 5%
Accrued interest on bond at maturity of futures contract = $14
I simply do not understand the relationship of the conversion factor to the other variables that are listed above. Specifically, I know you have to multiply calculated price on the futures contract by 1/CF, but what does this exactly mean in relationship to all the other variables described above?