Question

Assume that on January 16, the cheapest bond to deliver on the June Treasury bond futures contract is the 12 percent bond with a par value of $100,000, callable in about 19 years and maturing in about 24 years. Coupons are paid on September 15 and March 15. The price of the bond is 181.71875, and the CF is 1.79. The June futures price is 101.53125. Assume a 5.5 percent reinvestment rate. Interpret your result. Note that you will need to determine the accrued interest. Assume that the futures contract size is $100,000 with the delivery on June 1.

a)Days from Sep. 15 to Mar. 15 is 181.
b)Days from Sep. 15 to Jan. 16 is 123.
c)Days from Mar. 15 to Sep. 15 is 184.
d)Days from Mar. 15 to Jun. 1 is 78.
What is the compound value of the reinvested coupon? Please type your answer in the box below and keep two decimals

Answer 1

The compound value of the reinvested coupon can be calculated using the formula C = CF * (1 + r)ⁿ. Plugging in the values given in the question, the compound value is $1.8034.

Step-by-step explanation:

The compound value of the reinvested coupon can be calculated using the formula:

C = CF * (1 + r)ⁿ

Where:

• C is the compound value of the reinvested coupon
• CF is the cash flow of the coupon (in this case, $1.79)
• r is the reinvestment rate (5.5% or 0.055)
• n is the number of periods (in this case, the number of days from September 15 to March 15, which is 181)

Plugging in the values, we get:

C = 1.79 * (1 + 0.055/365)¹⁸¹

Calculating this equation gives us a compound value of $1.8034 (rounded to 2 decimals).