A portfolio manager plans to use a Treasury bond futures contract to hedge a bond

A US Treasury bond pays a 7% coupon on January 7 and July 7. How much interest accrues per $100 of principal to the bondholder between July 7, 2014, and August 8, 2014? How would your answer be different if it were a corporate bond?

It is January 9, 2015. The price of a Treasury bond with a 12% coupon that matures on October 12, 2030, is quoted as 102-07. What is the cash price?

How is the conversion factor of a bond calculated by the CME Group? How is it used?

A Eurodollar futures price changes from 96.76 to 96.82. What is the gain or loss to an investor who is long two contracts?

What is the purpose of the convexity adjustment made to Eurodollar futures rates? Why is the convexity adjustment necessary?

The 350-day LIBOR rate is 3% with continuous compounding and the forward rate calculated from a Eurodollar futures contract that matures in 350 days is 3.2% with continuous compounding. Estimate the 440-day zero rate.

It is January 30. You are managing a bond portfolio worth $6 million. The duration of the portfolio in 6 months will be 8.2 years. The September Treasury bond futures price is currently 108-15, and the cheapest-to-deliver bond will have a duration of 7.6 years in September. How should you hedge against changes in interest rates over the next 6 months?

The price of a 90-day Treasury bill is quoted as 10.00. What continuously compounded return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90-day period?

It is May 5, 2014. The quoted price of a government bond with a 12% coupon that matures on July 27, 2024, is 110-17. What is the cash price?

Suppose that the Treasury bond futures price is 101-12. Which of the following four bonds is cheapest to deliver?

It is July 30, 2015. The cheapest-to-deliver bond in a September 2015 Treasury bond futures contract is a 13% coupon bond, and delivery is expected to be made on September 30, 2015. Coupon payments on the bond are made on February 4 and August 4 each year. The term structure is flat, and the rate of interest with semiannual compounding is 12% per annum. The conversion factor for the bond is 1.5. The current quoted bond price is $110. Calculate the quoted futures price for the contract.

An investor is looking for arbitrage opportunities in the Treasury bond futures market. What complications are created by the fact that the party with a short position can choose to deliver any bond with a maturity of over 15 years?

Suppose that the 9-month LIBOR interest rate is 8% per annum and the 6-month LIBOR interest rate is 7.5% per annum (both with actual/365 and continuous compounding). Estimate the 3-month Eurodollar futures price quote for a contract maturing in 6 months.

Suppose that the 300-day LIBOR zero rate is 4% and Eurodollar quotes for contracts maturing in 300, 398, and 489 days are 95.83, 95.62, and 95.48. Calculate 398-day and 489-day LIBOR zero rates. Assume no difference between forward and futures rates for the purposes of your calculations.

Suppose that a bond portfolio with a duration of 12 years is hedged using a futures contract in which the underlying asset has a duration of 4 years. What is likely to be the impact on the hedge of the fact that the 12-year rate is less volatile than the 4-year ra

Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with a maturity of 180 days. If the paper were issued today, the company would realize $4,820,000. (In other words, the company would receive $4,820,000 for its paper and have to redeem it at $5,000,000 in 180 days time.) The September Eurodollar futures price is quoted as 92.00. How should the treasurer hedge the companys exposure?

On August 1, a portfolio manager has a bond portfolio worth $10 million. The duration of the portfolio in October will be 7.1 years. The December Treasury bond futures price is currently 91-12 and the cheapest-to-deliver bond will have a duration of 8.8 years at maturity. How should the portfolio manager immunize the portfolio against changes in interest rates over the next 2 months?

How can the portfolio manager change the duration of the portfolio to 3.0 years in Problem 6.17?

Between October 30, 2015, and November 1, 2015, you have a choice between owning a US government bond paying a 12% coupon and a US corporate bond paying a 12% coupon. Consider carefully the day count conventions discussed in this chapter and decide which of the two bonds you would prefer to own. Ignore the risk of default.

Suppose that a Eurodollar futures quote is 88 for a contract maturing in 60 days. What is the LIBOR forward rate for the 60- to 150-day period? Ignore the difference between futures and forwards for the purposes of this question.

The 3-month Eurodollar futures price for a contract maturing in 6 years is quoted as 95.20. The standard deviation of the change in the short-term interest rate in 1 year is 1.1%. Estimate the forward LIBOR interest rate for the period between 6.00 and 6.25 years in the future.

Explain why the forward interest rate is less than the corresponding futures interest rate calculated from a Eurodollar futures contract.

It is April 7, 2014. The quoted price of a US government bond with a 6% per annum coupon (paid semiannually) is 120-00. The bond matures on July 27, 2023. What is the cash price? How does your answer change if it is a corporate bond?

A Treasury bond futures price is 103-12. The prices of three deliverable bonds are 115-06, 135-12, and 155-28. Their conversion factors are 1.0679, 1.2264, and 1.4169, respectively. Which bond is cheapest to deliver?

The December Eurodollar futures contract is quoted as 98.40 and a company plans to borrow $8 million for three months starting in December at LIBOR plus 0.5%. (a) What rate can the company lock in by using the Eurodollar futures contract? (b) What position should the company take in the contracts?(c) If the actual three-month rate turns out to be 1.3%, what is the final settlement priceon the futures contracts. Explain why timing mismatches reduce the effectiveness of the hedge.

A Eurodollar futures quote for the period between 5.1 and 5.35 years in the future is 97.1. The standard deviation of the change in the short-term interest rate in one year is 1.4%. Estimate the forward interest rate in an FRA.

It is March 10, 2014. The cheapest-to-deliver bond in a December 2014 Treasury bond futures contract is an 8% coupon bond, and delivery is expected to be made on December 31, 2014. Coupon payments on the bond are made on March 1 and September 1 each year. The rate of interest with continuous compounding is 5% per annum for all maturities. The conversion factor for the bond is 1.2191. The current quoted bond price is $137. Calculate the quoted futures price for the contract.

Assume that a bank can borrow or lend money at the same interest rate in the LIBOR market. The 90-day rate is 10% per annum, and the 180-day rate is 10.2% per annum, both expressed with continuous compounding and actual/actual day count. The Eurodollar futures price for a contract maturing in 91 days is quoted as 89.5. What arbitrage opportunities are open to the bank?

A Canadian company wishes to create a Canadian LIBOR futures contract from a US Eurodollar futures contract and forward contracts on foreign exchange. Using an example, explain how the company should proceed. For the purposes of this problem, assume that a futures contract is the same as a forward contract.

On June 25, 2014, the futures price for the June 2014 bond futures contract is 118-23. (a) Calculate the conversion factor for a bond maturing on January 1, 2030, paying a coupon of 10%. (b) Calculate the conversion factor for a bond maturing on October 1, 2035, paying a coupon of 7%. (c) Suppose that the quoted prices of the bonds in (a) and (b) are 169.00 and 136.00, respectively. Which bond is cheaper to deliver? (d) Assuming that the cheapest-to-deliver bond is actually delivered on June 25, 2014, what is the cash price received for the bond?

A portfolio manager plans to use a Treasury bond futures contract to hedge a bond portfolio over the next 3 months. The portfolio is worth $100 million and will have a duration of 4.0 years in 3 months. The futures price is 122, and each futures contract is on $100,000 of bonds. The bond that is expected to be cheapest to deliver will have a duration of 9.0 years at the maturity of the futures contract. What position in futures contracts is required? (a) What adjustments to the hedge are necessary if after 1 month the bond that is expected to be cheapest to deliver changes to one with a duration of 7 years? (b) Suppose that all rates increase over the next 3 months, but long-term rates increase less than short-term and medium-term rates. What is the effect of this on the performance of the hedge?