I need help with questions 4,5, and 6 on the attached document. Please show how you calculated the answer and explain how you got to the answer.

Also, if you can please check questions 1-3 to see if I calculated them correctly. Please provide feedback to those as well.

This is an Derivatives class assignment.

CHEAPEST TO DELIVER No accrued interest Suppose that the Treasury bond futures price is 101-12. Which of the following four bonds is cheapest to deliver? Bond Price Conversion Factor 1 2 3 4 125-05 142-15 115-31 144-02 1.2131 1.3792 1.1149 1.4026 The cheapest-to-deliver bond is the one for which (Futures price * CF) - Quoted price is is least. Calculating this factor for each of the 4 bonds we get Bond Tbond Futures Price Conversion Factor 1 2 3 4 101.375 101.375 101.375 101.375 1.2131 1.3792 1.1149 1.4026 (Futures Price * Futures Price * Quoted Bond Price conversion Conversion (decimal) factor) - Quoted Factor Bond Price 122.9780125 139.8164 113.0229875 142.188575 Bond 4 is therefore the cheapest to deliver. 125.15625 142.46875 115.96875 144.0625 -2.1782 -2.6524 -2.9458 -1.8739 The cheapest to deliver here is the bo Calculate accrued interest A U.S. Treasury bond pays a 7% coupon on January 7 and July 7. How much interest accrues per $100 of principal to the bond holder between July 7, 2016 and August 8, 2016 (the delivery date for the bond)? 1/7/2016 Coupon payment of 7% per year (assume $100 principal), each payment = $3.5 7/7/2016 Coupon payment of 7% per year (assume $100 principal), each payment = $3.5 How much interest accrues between 7/7/16 and 8/8/2016 There are 184 days between the coupon payments (1/7 and 7/7, and between 7/7 and 8/8 there are 32 days) Interest accrued = 3.5 *32/184 (You "earn" 32/184 of the $3.5 coupon payment) $0.6087 Determine the cash price for a bond It is January 9, 2015. The price of a Treasury bond with a 12% coupon that matures on October 12, 2030, is quoted as 102-07. What is the cash price? Cash price = quoted price + accrued interest Between October 12, 2014 and January 9, 2015 there are 89 days It is assumed that coupon payments are made on October 12 and April 12 Between October 12, 2014 and April 12 there are 182 days With a 12% coupon (semi-annual), each coupon payment would be $6 on principal of $100 Interest accrued = 6 *89/182 (You "earn" 89/182 of the $6 coupon payment) Quoted price in decimal Cash price = quoted price + accrued interest $2.9341 $102.2188 $105.1528 IMPLIED REPO RATE (see example from text, in 10th edition, this starts on pg 328) What is the annualized implied repo rate on a T-bond arbitrage if, as of September 15, 2015, the spot price for a 6 3/8 bond maturing Aug 15, 2031 is 147 18/32. As of this date, the accrued interest is 0.5370, the futures price is 140, the conversion factor (CF) is 1.0370. Delivery will be March 8, 2016 in this example (a leap year). From September 15 to March 8 is 175 days, so T = 175/365 = 0.47945 and assume the reinvestment rate is 1.0%. There is one interest payment made during this period. What is the implied repo rate? We are given that the bond expires on 8/15/2031 and it makes semi-annual bond payments. Further, the bond is From this, we know that the semi-annual interest payments are made on August 15 and Feb 15. We know that the bond interest (coupon) payments will by 6.375/2 = 3.1875 each. ( ) holding period = 175 days 31 days 8/15/15 last coupon 22 days 184 days 9/15/15 2/15/16 day bond price is quoted next coupon 3/8/16 delivery date = {([()()+ _+ _ (,)])/(+ _0 )}^(1/()) 1 *** In this example, a coupon payment is received between time 0 and delivery. If there is no coupon payment recei B0 147.5625 quoted bond price 147 18/32 AI0 0.537 148.0995 140 1.037 Cash price f(0) CF AIT reinvestment rate interest paid T-t CI0,T 0.3853021978 0.01 3.1875 22 accrued interest as of Sept 15, 2015, given, but if calculated = 3.1875*31/ Cash price for bond (B0 + AI0) futures price (given) conversion factor accrued interest as of 3/8/16 = 3.1875 * 22/182 = 0.3698 given reinvestment rate (used for the reinvestment of the coupon pmt rece between 9/15/16 and delivery, the holder of the bond will receive 1 interest This interest payment will accrue interest (at 1%, the reinvestment rate) un 3.1894 value of reinvested coupons (these are any coupons between 9/15/16 and Holding period 0.47945 This is the number of days between 9/15/16 and delivery, 175/365 Implied repo rate = 0.925% EURODOLLAR FUTURES ARBITRAGE If you buy both a 90-day Eurodollar CD paying 6.7 percent and a 90-day futures on a 90-day Eurodollar CD with a price implying a yield of 7.2 percent, what is your total annualized return? (Both yields are based on 360-day years.) You are investing for a total of 180 days under the above scenario. The first 90 days are at a (360 day year) annualize This is followed by a futures contract which starts in 90 days. This second 90 day period is now at a rate of 7.2%. First rate: .067*90/360 = 0.01675 2nd rate: .072*90/360 = 0.018 Overall rate for 180 days = (1.01675)(1.023) - 1 = 0.0350515 Annualized rate = 1.040135 ^ (365/180) - 1 = 7.24% ds is cheapest to deliver? Convert the quoted bond prices to a decimal