Cost of Bond Delivery into a Treasury Bond Futures Contract
We will cover following topics
Introduction
When participating in Treasury bond futures contracts, market participants have the option to deliver an underlying Treasury bond upon contract expiration. The cost associated with delivering a bond involves considerations such as the bond’s price, accrued interest, and potential delivery costs. This chapter explores the process of calculating the cost of delivering a bond into a Treasury bond futures contract, highlighting key components that impact this calculation.
Understanding the Cost Components
The cost of delivering a bond into a Treasury bond futures contract comprises several key components:
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Bond Price: The current market price of the underlying Treasury bond.
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Accrued Interest: The interest that has accumulated on the bond from its last coupon payment date to the delivery date. Accrued interest is calculated using the following formula:
$$ \text { AccruedInterest }=\text { Days Since Last Coupon } \times \frac{\text { Coupon Rate }}{\text { Days in Coupon Period }} \times \text { Face Value }$$
- Delivery Costs: Additional costs associated with delivering the bond, including transaction costs and potential price adjustments.
Calculation Process
To calculate the cost of delivering a bond into a Treasury bond futures contract, follow these steps:
1) Determine the bond’s current market price.
2) Calculate the accrued interest since the last coupon payment date using the formula provided.
3) Sum the accrued interest and the bond’s market price to obtain the total cost of delivering the bond.
4) If applicable, factor in any delivery costs associated with the transaction.
Example: Let’s consider a scenario where an investor holds a Treasury bond with a face value of USD 1,000, a coupon rate of 5%, clean price of USD 1020, and there are 90 days since the last coupon payment. Additionally, the investor anticipates delivery costs of USD 10.
1) Calculate Accrued Interest:
$$\text{Accrued Interest} = 90 \times \frac{0.05}{180} \times 1000 = \text{USD 12.50}$$
2) Total Cost of Delivering the Bond:
$$\text{Total Cost} = \text{Bond Price} + \text{Accrued Interest} = 1,020+ 12.50 = \text{ USD 1,032.50}$$
3) Incorporate Delivery Costs:
$$\text{Total Cost with Delivery Costs} = \text{Total Cost} + \text{Delivery Costs} = 1,032.50+ 10 = \text{USD 1,042.50}$$
Conclusion
Calculating the cost of delivering a bond into a Treasury bond futures contract involves understanding the components that contribute to this cost. Accrued interest, bond price, and potential delivery costs are critical considerations. By accurately assessing these factors, market participants can make informed decisions about participating in Treasury bond futures contracts and effectively manage their exposure to interest rate risk.