Conversion factors for eligible bonds are computed as the clean price of $1 face value of the eligible bond discounted at a yield to maturity of 6%. As a consequence, bonds with a 6% coupon will have a CF of 6%, bonds with coupons higher than 6% will have CFs greater than 1, and bonds with a coupon less than 6% will have CFs less than 1.
Full Answer
How are conversion factors computed for eligible bonds?
Conversion factors for eligible bonds are computed as the clean price of $1 face value of the eligible bond discounted at a yield to maturity of 6%. As a consequence, bonds with a 6% coupon will have a CF of 6%, bonds with coupons higher than 6% will have CFs greater than 1, and bonds with a coupon less than 6% will have CFs less than 1.
What is a conversion factor?
Every cash note or bond that is eligible for delivery into a Treasury futures contract has a conversion factor that reflects its coupon and remaining time to maturity as of a specific delivery month. A conversion factor is the approximate decimal price at which $1 par of a security would trade if it had a six percent yield-to-maturity.
What is the correct conversion factor for time to maturity?
What naturally seems to be the correct conversion factor to get the quoted price of a bond with coupon c and time to maturity M is CF = P (M,y,c)/P (N,y,0.06). When y=0.06, this conversion factor is the same one defined by Hull, but otherwise they need not be the same.
What does CME's proposed conversion date mean for You?
"Our proposed conversion date will help our clients complete their operational work as early as possible in the transition process, while closely aligning with the recently published industry timelines for over-the-counter interest rate swaps," said Agha Mirza, CME Group Global Head of Rates and OTC Products.
What is the conversion factor for a bond?
When y=0.06, is the conversion factor the same?
What is the definitive guide to bond futures?
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How do you calculate conversion factor?
Determine the required yield of the recipe by multiplying the new number of portions and the new size of each portion. Find the conversion factor by dividing the required yield (Step 2) by the recipe yield (Step 1). That is, conversion factor = (required yield)/(recipe yield).
What is the conversion factor for a bond?
The conversion factor, for any particular bond deliverable into a futures contract, is a number by which the bond futures delivery settlement price is multiplied, to arrive at the delivery price for that bond.
How do you calculate futures conversion factor?
For example, a conversion factor of 0.8112 means that a bond is approximately valued at 81% of a 6% coupon security. The price of bond futures can be calculated on the expiry date as: Price = (bond futures price x conversion factor) + accrued interest.
What is conversion factor in interest rate futures?
Conversion Factor. The conversion factor equates the deliverable security (per rupee of principal), to yield 7% with semiannual compounding. Cheapest to Deliver Bond (CTD) Bond which can be bought at cheapest price from underlying bond market and delivered against expiring futures contract is called CTD bond.
What is DV01?
Dollar duration is often referred to formally as DV01 (i.e. dollar value per 01). Remember, 0.01 is equivalent to 1 percent, which is often denoted as 100 basis points (bps). To calculate the dollar duration of a bond you need to know its duration, the current interest rate, and the change in interest rates.
How are Treasury bond futures priced?
Prices are quoted in points per $2000 for the 2-year and 3-year contract and points per $1000 for the all other U.S. Treasury futures. The fractional points are expressed in 1/32nd in line with the convention in US government bond market.
How are bond futures quoted?
Most of the bond futures are quoted on forward price basis where the settlement price indicates the cash received by the short party for delivery of the underlying bond. The future price is determined by pricing a standardized bond using quote as yield to maturity. Standard bonds have terms published by the exchange.
How do you hedge bonds with futures?
A hedger would sell a futures contract to offset interest-rate risk on bonds in his portfolio. If interest rates rise, the price drop of his bond portfolio would be offset by a gain in the value of his short position in T-Bond futures contracts.
Are bond futures interest rate derivatives?
An interest rate future is a financial derivative (a futures contract) with an interest-bearing instrument as the underlying asset. It is a particular type of interest rate derivative. Examples include Treasury-bill futures, Treasury-bond futures and Eurodollar futures.
How do you calculate quoted futures price?
FO = (S0-I) e (rT)(Most Recent Settlement Price * Conversion Factor) + Accrued interest interest.Quoted Bond Price + Accrued Interest.Quoted Bond Price – (Most Recent Settlement Price * Conversion Factor)(Most Recent Settlement Price *Conversion Factor) + Accrued Interest.
What is CTD bond?
CTD = Current Bond Price – Settlement Price x Conversion Factor. The current bond price is determined based on the current market price with any interest due to a total. Additionally, the calculations are more commonly based on the net amount earned from the transaction, also known as the implied repo rate.
How much is a ZB contract?
According to the CME, ZB specs include: Face value: USD 100,000. Point value: full point = $1,000. Deliverable maturities: 25-30 years.
What is the conversion value of a convertible bond?
The conversion price of the convertible security is the price of the bond divided by the conversion ratio. If the bonds par value is $1000, the conversion price is calculated by dividing $1000 by 5, or $200.
What is the conversion ratio for a convertible bond?
Convertible Bonds The conversion ratio can also be found by taking the bond's par value, which is generally $1,000, and dividing it by the share price. A stock trading for $40 has a conversion ratio equal to $1,000 divided by $40, or 25.
What is the conversion price?
The market conversion price is the amount investors pay per share when exercising their option to exchange convertible securities, typically bonds or preferred stock, into common stock. The market conversion price is calculated by dividing the convertible security's market price by its conversion ratio.
What is the conversion premium on a convertible bond?
The convertible bond premium, or conversion premium, is the difference between the current stock price and the conversion price. For example, if a convertible bond can be exchanged for stock at $50 per share, and the current stock price is $45, then the conversion premium is $5.
Treasury Conversion Factors - CME Group
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Bond Futures, Conversion Factor and Cheapest-to-deliver (CTD)
Bond Futures, Conversion Factor and Cheapest-to-deliver (CTD) Definition A bond futures contract is an agreement on a recognised futures exchange to buy or sell a standard face-value amount of a … - Selection from Key Financial Market Concepts, 2nd Edition [Book]
Definition of term conversion factor - iotafinance.com
Example: Bond: Name: Bundesobligation (Ticker Bloomberg ticker: DBR) Coupon: 4.000% Maturity: 04-JAN-2018 Future: BUND JUNE 2009 Nominal coupon: 6.000%
Conversion Factor: What is Conversion Factor? Options and Futures ...
A factor used to equate the price of T-bond and T-note futures contracts with the various cash T-bonds and T-notes eligible for delivery. This factor is based on the relationship of the cash ...
What is the conversion factor for a bond?
Hull defines the conversion factor for a bond as the "quoted price the bond would have per dollar of principal on the first day of the delivery month on the assumption that the interest rate for all maturities equals 6% per annum."
When y=0.06, is the conversion factor the same?
When y=0.06, this conversion factor is the same one defined by Hull, but otherwise they need not be the same. Is there some reason why it is assumed that the conversion factor is constant? y need not be close to 0.06, and M can be different from N, so it doesn't seem clear that the (constant) conversion factor gives anything useful.
What is the definitive guide to bond futures?
The definitive guide to bond futures is The Treasury Bond Basis: An in-Depth Analysis for Hedgers, Speculators, and Arbitrageurs. I read it cover to cover a few times and learned new things every time I read it... In addition, there are a few Salomon Brothers research notes that I found tremendously helpful:
Which method identifies the eligible bond that generates the highest returns?
The first method identifies the eligible bond that generates the highest returns (implied repo rate on a cash-and-carry trade
Why is the CF imperfect?
The process to compute the CF is imperfect because it assumes a flat interest rate term structure. This bias in the computation of CFs means that one of the eligible bonds will generate the greatest gain (or smallest loss) to the short party at delivery. This bond is the cheapest-to-deliver-bond. This is the bond that will be used to price ...
What is the coupon rate for Treasury bonds?
The price of Treasury bond futures is based on a notional government bond. The notional government bond is assumed to have a coupon rate of 6%. Each eligible bond that can be delivered by the short party is assigned a conversion factor to reflect its value relative to the notional bond in the contract.
What is the conversion factor for a bond?
Hull defines the conversion factor for a bond as the "quoted price the bond would have per dollar of principal on the first day of the delivery month on the assumption that the interest rate for all maturities equals 6% per annum."
When y=0.06, is the conversion factor the same?
When y=0.06, this conversion factor is the same one defined by Hull, but otherwise they need not be the same. Is there some reason why it is assumed that the conversion factor is constant? y need not be close to 0.06, and M can be different from N, so it doesn't seem clear that the (constant) conversion factor gives anything useful.
What is the definitive guide to bond futures?
The definitive guide to bond futures is The Treasury Bond Basis: An in-Depth Analysis for Hedgers, Speculators, and Arbitrageurs. I read it cover to cover a few times and learned new things every time I read it... In addition, there are a few Salomon Brothers research notes that I found tremendously helpful: