conversion factor for bonds remember, where, factor, conversion, interest

Sunshine4ever

Some where, I remember we divide by the conversion factor, but now I see in the interest rate futures section, we multiply by the conversion factor to get the bond price....what's the deal here?

ayaz_mahmud369

I do not have the book with me right now ... but once I get back - I too will check...

CP

bingbingliang

You multiply by 1/CF, which is the same as dividing by it.

BelalM

When you sign up for a futures contract on a bond - you have a particular bond to be delivered in mind. But if multiple folks try to look at the same bond for a delivery option -> you are going to have a mispricing scenario - more demand for the same bond.

to prevent this from happening - the "seller" can use any of a series of bonds to deliver. They use a Conversion factor - to decide how much of the bond they would deliver.

"true" Delivery Bond is assumed as being a 6% Coupon Bond delivered at Par. Now if you deliver a bond with a 7% Coupon - your price will be higher. So you would have a Conversion Factor > 1 = and you therefore (as seller) have to deliver less of the bond.

CP