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The conversion factor (CF) for the cheapest to deliver bond (CTD) is an important concept used to price fixed income futures. The conversion factor is needed to determine the principal invoice price. This is the price that the short party of a fixed income futures will receive upon settlement.
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31 sie 2024 · CTD = Current Bond Price – Settlement Price x Conversion Factor. The current bond price is determined based on the current market price with any interest due to a total. Additionally, the...
Hull defines the conversion factor for a bond as the "quoted price the bond would have per dollar of principal on the first day of the delivery month on the assumption that the interest rate for all maturities equals 6% per annum."
19 sty 2024 · The conversion factor represents the estimated decimal price at which $1 par value of the security would trade if it had a yield to maturity of 6%. The conversion factor serves a pragmatic role by standardizing the valuation of deliverable securities.
The conversion factor, for any particular bond deliverable into a futures contract, is a number by which the bond futures delivery settlement price is multiplied, to arrive at the delivery price for that bond.
When a futures contract is held until maturity, the delivery price of a bond for physical settlement of the future is obtained by multiplying the bond's price with its conversion factor.
Conversion Factor: The conversion factor is a measure of the bond's relative value compared to the underlying futures contract. It takes into account the bond's coupon rate, maturity, and yield. The CTD bond will have the highest conversion factor among the eligible bonds. Calculation Formula for CTD