Suppose the December CBOT Treasury bond futures contract has a quoted

QUESTION

Suppose the December CBOT Treasury bond futures contract has a quoted price of 80-07. What is the implied annual interest rate inherent in the futures contract? Assume this is a a 20 year bond with semi-annual interest payments. The face value of the bond is $1000, and the semi-annual coupon payment
Current price of bond under future contract = 1000*(.80 .07/32) = 802.19 Current rate of return on bond (Applying bond valuation equation and PVAF method): 802.19 = 30*(1-(1 i)^-40)/i 1000/(1 i)^40 i = 4% Revised semi annual rate (i)

ter 1% increase = .04 .5 = 4.5% Revised bond value: 30*(1-(1 .045)^-40)/.045 1000/(1 .045)^40 = 723.98 Change in value = 723.98-802.19 = -78.21 OR Loss of $78

ANSWER:

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