6. The price of a 90-day Treasury bill is quoted as 12.00. What continuously compounded return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90-day period?
Bond |
Price |
Conversion Factor |
1 |
126-15 |
1.2131 |
2 |
143-25 |
1.3792 |
3 |
116-23 |
1.1149 |
4 |
145-12 |
1.4026 |
6). Cash Price = 100 - [(90 / 360) x 12] = 100 - 3 = $97
Annualized continuously compounded return = [365 / 90] x ln[1 + {(100 - 97) / 97}]
= 4.0556 x ln[1.0309]
= 4.0556 x 0.0305 = 0.1235, or 12.35%
7). The cheapest-to-deliver bond is the one for which,
Quoted Price - (Futures Price x Conversion Factor) is least. Calculating this factor for each of the 4 bonds we get:
Bond 1: 126.46875 - [102.625 x 1.2131] = 126.46875 - 124.49439 = 1.97436
Bond 2: 143.78125 - [102.625 x 1.3792] = 143.78125 - 141.54040 = 2.24085
Bond 3: 116.71875 - [102.625 x 1.1149] = 116.71875 - 114.41661 = 2.30214
Bond 4: 145.37500 - [102.625 x 1.4026] = 145.37500 - 143.94183 = 1.43318
Bond 4 is therefore the cheapest to deliver.
Get Answers For Free
Most questions answered within 1 hours.