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.作者: Micholien 时间: 2013-4-28 08:13
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.作者: Colum 时间: 2013-4-28 08:13
Yes I understand that. But why not the first one as I calculated?作者: mnieman 时间: 2013-4-28 08:13
Is it because of the yield curve is not flat?作者: giorgio10 时间: 2013-4-28 08:13
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.作者: TheMBAGlover 时间: 2013-4-28 08:13
Thanks Wianek.
I think risk free rate is the word here.
