Derivatives Question

Could someone explain the part of the solution I have bolded below? I understand the how to use the formula to solve htis but was getting tripped up with the coupon payment and why it isn’t just 3500.

Currently Sheroda is long a US Treasury futures position. Parisi notes the following information for the cheapest to deliver US Treasury bond for the contract; the bond has a face value of $100,000, pays a 7% semiannual coupon, and matures in 15 years. The bond is priced at $156,000, has no accrued interest, and a yield of 2.5%. The futures contract expires in 8 months, and the annualized risk-free rate is 1.5%. There are multiple deliverable bonds, and the conversion factor for this bond is 1.098.

Based on the information provided by Parisi, the price of the bond futures contract Sheroda holds in Quantum is closest to:

  1. 141,234
  2. 140,298
  3. 146,689

There is no accrued interest, but the bond pays a $3,500 coupon in 6 months, and the future value of the coupon at expiration will be $3,508.6958 = 3500(1.015)(2/12)

If you got a coupon payment of $3,500 in 6 months, what would it be worth in 8 months? Would you stuff it in your mattress, or would you invest it to earn some (risk-free) interest?


I have the following question please: when we have to calculate the price of a futures price (on treasury bonds), do we always assume that we do this calculation exactly on the coupon payment date? I presume that we do it to make things easier, because otherwise I cannot see anywhere in the text to be said that there are exactly 2 months for which we have to calculate the FV of the coupon 3.5% semi-annual…

Oh, I see it…

It is said that the bond has no accrued interest, which means that we are just on the day which is the coupon PMT date… and form here, we have to consider that in 6 more months we will have another coupon PMT of 3,500 (semi-annual) and we have another 2 months left until futures contract expiration (therefore we have to calculate its FV and subtract it in order to find the futures contract price)…

@S2000magician: about the accrued interest for the last 2 months? should that be deducted from future price as well please?