Treasury Yield Qn percent, calling, contract, annual, future

Kiakaha

A $1 face value bond pays an 8 percent semiannual coupon. The annual yield is 6%. The bond has 10 years remaining until maturity, and its price is $1.1488. Consider a futures contract calling for delivery of this bond only. The contract expires in 18 months. The risk-free rate is 5 percent. compute the future price.
Why can’t I key in N=8.5, I/Y=3, pmt=4, and FV=100 to get the answer? I know the other method.

TheMBAGlover

Thanks Wianek.
I think risk free rate is the word here.

giorgio10

I’m assuming that by “N=8.5, I/Y=3, pmt=4, and FV=100” you are trying to caclulate the value of the underlying bond in 18 months.
1) N should equal 17, since in 18 months you have 17 coupon payments left.
2) PYMT should equal 0.04, I/Y should be 0.03 and FV should be 1
2) Even if you do this you will not calculate the no-arbitrage CURRENT price of the futures contract since you are not taking into account the risk free rate.

mnieman

Is it because of the yield curve is not flat?

Colum

Yes I understand that. But why not the first one as I calculated?

Micholien

Futures Price = Bond Price * (1 + Risk Free)^T - Future Value of Coupon Payments
If there is a conversion factor, then you have to divide the futures price obtained above by the factor.