The cheapest to deliver bond for a treasury bond futures contract is the one with the :

The cheapest to deliver bond for a treasury bond futures contract is the one with the :
A . the lowest yield to maturity adjusted by the conversion factor
B . the lowest coupon
C . the lowest basis when comparing cash price to the futures spot price adjusted by the conversion factor
D . the highest coupon

View Answer

Answer: C

Explanation:

Treasury bond futures do not specify which bond can be used to effect delivery, but allow the seller to pick from a number of available bonds. As a result, one of these eligible bonds emerges as being the ‘cheapest’ to deliver, and this CTD bond is determined by the basis between the cash price of the bond and the futures spot price as adjusted by the conversion factor for this specific bond. (ie, basis = Cash Price of the Bond – Futures Price

x Conversion Factor)

The bond with the lowest basis is generally the CTD – therefore Choice ‘c’ is the correct answer.