QUESTION 3:

a. Today is March 14, 2020 and the 7 % coupon T. Bond maturing on August 15, 2036 is priced at $120 per $100 face value. The current Future T. Bond (FTB) contract for delivery in September of 2020 is $107 (per $100 face value). If the conversion factor for the 7 % T. Bond is 1.1261, calculate the profit (loss) for T. bond arbitrage using the 7 % T. Bond (ie. The cheapest to deliver calculation in textbook) using a 4% borrowing rate. Assume delivery takes place on September 30, 2020.

b. If the FTB price on September 30, 2020 is $110 (per $100 face value) calculate its effect on your answer in (a).