Pricing Interest Rate/Treasury Bond Futures

The pricing of Treasury bond futures is performed in the same formulaic manner as presented earlier in the futures section.
Note that the spot price includes any accrued interest for the bond.
The Treasury bond future price must be divided by the conversion factor.
Because the futures contract seller is allowed to deliver from a range of bonds at expiration to fulfill the contract, a conversion factor must be applied to the futures price.
Treasury bond pricing is based on the "cheapest to deliver" (CTD) bond as this would be the most rational decision for the futures contract seller.

Treasury Bond Futures Price: f0(T) = [S0 - PV(CF)](1+r)T

Treasury Bond Futures Price (alternative formula): f0(T) = S0(1+r)T - FV(CF)

Treasury Bond Price = Futures Price of the CTD/Conversion factor

Note: expect the exam to provide the CTD bond and the conversion factor. The test taker may be required to price a futures contract, given that data.

Either of the formulas from step 1 could be divided by the conversion factor; either would yield the same result.

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