US T-bond futures conversion factor (CF, FRM T3-25)

[Here is my XLS trtl.bz/2BqWfj4] The US T-bond futures contract conversion factor (CF) basically: 1. Rounds the maturity DOWN to the nearest 3 months (0.25 years), 2. Obtains the Quoted (aka, clean, flat) price, and 3. Assumes a flat 6.0% yield curve. Discuss this video here in our FRM forum: trtl.bz/30qSK4M.

[@jzzhou1639]

Thanks for your example. But I think there is a mistake with the maturity used in conversion factor. For example, it is cell D9 should be used instead of D8.

[@davidfrick2621]

Thank you, David, this was very helpful. Even Fabozzi in Fixed Income Analysis (2d Ed) does not go into detail on how the CF is calculated, instead just referring to CFs provided by the CME. However, I should point out that in addition to cell D14, I believe there is another typo in cell R7 which is discounted using the coupon rate in F6 rather than the yield in F7. Still, I do not think this diminishes the value of the conceptual analysis provided.

[@alexismanuelrizolopez8354]

The time to maturity used is the the time that the bond has left at the beginning of the futures contract?

[@saurabh957]

Hi. In calculation of "Full price (PV) T0 + 0.25" for Bond 2, for calculating the Accrued Interest why the 8% coupon rate is divided by 2 instead of 4?

[@santoshsingh5656]

Hi. To calculate pv of Bond 1 you have used D7 as Time to matrity. I think it should be D8 since you are calculating quoted price

[@bionicturtle]

Hi Santosh, Yes, you identified a mistake, thank you! For Bond 1, i use 20.17 (cell D8) but I should have used the rounded 20.00 (cell D9) for the price, such that the price should be '=IF(D10="six",-PV(D7/2,D9*2,D5*D6/2,D5),D13) = $146.230, with CF = 1.46230. Sorry for any confusion. Thank you!

[@patefon5088]

Hi. It is not clear how did u calculated the F11. In the column C it is stated that you calculate full price + 0.25, but in your calculation you calculate a simple CLEAN price for 18 years + additional 0.5 coupon. What is the purpose?
Later in the cell F12 you take a square root of the F11 number and for me it does not make any sence from the time value of money perspective.
Could you please explain the physics behind thos 2 cells. Thank you. Kindly appreciate your channel.

[@YK-jn2kp]

It used to be 8% before but now, why 6% yield assumption is used to produce the conversion factor??

[@bionicturtle]

I think it has been 6.0% since I have been teaching the concept (for a while). In any case, it is currently 6.0%, see www.cmegroup.com/trading/interest-rates/us-treasury-futures-conversion-factor-lookup-tables.html i.e., "Every cash note or bond that is eligible for delivery into a Treasury futures contract has a conversion factor that reflects its coupon and remaining time to maturity as of a specific delivery month. A conversion factor is the approximate decimal price at which $1 par of a security would trade if it had a 6% yield-to-maturity."

[@simfinso858]

Nicely Explained

[@bionicturtle]

Thank you! We appreciate you watching!

[@kprice399]

What’s the authors name you’re referring to, pls? Thx

[@noodliedoodle]

I believe it's John Hull

[@MaczaSPod]

Options, Futures and Other Derivatives 7th edition John Hull

[@PABLO-oq1kt]

What is PV?

[@myblrapp9627]

Present value

[@Ro1Pat]

boring