Am hoping someone can help me understand why we don’t deduct AI at expiry when calculating bond futures price in the following problem.
I understand that there’s no AI at time of entering the contract. But at time of expiry, i.e., 8 months from now, there should be AI of $3,500 * (2/6), since 2 months will have elapsed since the latest coupon payment.
We note 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.
Q. Based on the information provided, the price of the bond futures contract is closest to:
The official answer is B, and I don’t understand why accrued interest isn’t deducted at time T.