Futures, you know you love them...

CFA Level II
#1

This is from a schweser concept checker. An 8-year $1,000 par Treasury bond pays a 7% semiannual coupon. The bond has a conversion factor of 1.025. The risk-free rate is 6% and the annual yield on the bond is 7%. The bond just made a coupon payment. The price of a 15-month futures contract on this bond is closest to: A) $979.00 B) $1003.47 C) $1049.32 D) $1075.55

#2

i got A

#3

A

#4

A …I do love them

#5

if you couldn’t calculate the answer, is there a way to eliminate answers given the difference in bond yield and 15-month riskfree rate??

#6

Well, the bond is priced at par. You are subtracting the PV(coupons), and the conversion factor 1/1.025 will provide further discount, so you know that the price has to be less than par.

#7

I’d say (A). F(0,T) = [1000-35/1.06^.5 - 35/1.06]*(1.06^(15/12)) / 1.025 = 979 However, I ain’t going to lie…I totally forgot that there were such things as a 15 month futures contract on a 96 month bond!!! Does this mean that after buying the bond, he must sell it after 15months? what’s the use of this contract if it’s not for a full8 years?

#8

Yup, it’s A. I forgot the conversion factor when I did it…oops.

#9

boston_level2_candidate Wrote: ------------------------------------------------------- > I’d say (A). > > F(0,T) = [1000-35/1.06^.5 - > 35/1.06]*(1.06^(15/12)) / 1.025 = 979 > > However, I ain’t going to lie…I totally forgot > that there were such things as a 15 month futures > contract on a 96 month bond!!! > > Does this mean that after buying the bond, he must > sell it after 15months? what’s the use of this > contract if it’s not for a full8 years? The long futures contract means that he is locking into a price for the bond in 15 months. He doesn’t have to hold onto it.

#10

B I somewhat recall that the conversion factor doesn’t come into play untill delivery at the expiration of the contract. So don’t divide by 1.025 I am not 100% on this, what’s the answer?

#11

wanderingcfa Wrote: ------------------------------------------------------- > Yup, it’s A. > > I forgot the conversion factor when I did > it…oops.

#12

dumb question but can someone remind me what the conversion factor is again?

#13

jackoliver Wrote: ------------------------------------------------------- > B > > I somewhat recall that the conversion factor > doesn’t come into play untill delivery at the > expiration of the contract. > So don’t divide by 1.025 > > I am not 100% on this, what’s the answer? Questions from the chapter always had us doing price x (1/CF). Think these dudes are right.

#14

Thanks Zim - better to get it wrong now than on the 7th.

#15

value of future = ( 1000 - 35/1.06^0.5 - 35/1.06) * 1.06^1.25 / 1.025 = 979.00 A