Okay so this was the last question on Derivatives on test 5151, something like compute the arbitrage free price of this bond today and it gave you the bond’s MV 10,6xx,xxx, FV of coupons 60x,xxx and PV of coupons 588,xxx. Par was 10mil So I tried of course to compute the futures price of the bond as (MV-PV Bonds)*(1+rf) (note rf wasn’t given I imputed it from the given PV and FV of the coupon payments). The Answers had nothing to do with the rf though they were A) Par Value-PV of Coupons (9,4xx,xxx) B)MV-FV of Coupons C)MV-PV of Coupons I chose C on the rationale that at least the values line up temporally (yes I was reaching), as in the the MV and PV are both values as of today, whereas in B MV is today and FV of Coupons is at expiry and for A Par value is at expiry and PV of Coupons is today. Anyone remember or know how to answer this one??
I certainly put c Something like 11,056,110 wow that’s good memory
Cool, but I think it was more like 10,056,110 because both B and C were in the 10s with C larger than B because it took the smaller value of PV of coupons out of the MV of the bond which was the same for both B and C obvi. Anyone else??
It was C and the answer was somehting like 10,100,100
1010177717177711000
Yes… I do remember the 056… You are right it was 10
10,056 my vote
So C seems to be the consensus thus far, this is encouraging? Anyone else, particularly anyone with reasoning as to why the arb free price is the MV of the bond today less the PV of the coupons?? And by reasoning I mean something more solid than my temporal justification in the OP:)
(spot-pv) (1plus rfr)t
The thing was, this is a TBOND. Therefore, you have to use the FVD, not the PV.
I went back and forth on this question, and I don’t remember what I went with ultimately, but if I had to choose again it would be Market- FV Coupons.
@jdane: Why? The only difference between a T bond and a regular bond is that you have to use the conversion factor (which wasn’t given for this question) when computing the futures price.
I also did it this way ©
Does the 10,056 sound familiar? I reeeeally need this one right
I think 10,056 was B as C was a little larger since we took out the PV of Coupons for C as opposed to the FV of Coupons (a larger number) for B. But I could be wrong as I don’t remember the numbers exactly, I only remember the calculations that yielded those numbers (but I think the values were listed in increasing order, i.e. making A the smallest and growing with C being the biggest).
I was psyched when I first read the question because I remembered for T-Bond incorporate the (1/conversion factor)…but no, no conversion factor, and no risk-free rate. I went with C as it made most sense to me to use market value (current) with PV Couons (current).
So 10,056 is wrong?
I think 10,056 was C, is that wrong? And it was the second largest number… Pleas confirm that was right… So that at least I know I got 1/120
how can the forward price be in terms of PV…
Isnt the formula either FP=So (1 + Rf)t - PVC which is equivalent to FP= (So - FVC) (1+Rf)t