Which of the following bonds would be cheapest to deliver gi

Which of the following bonds would be cheapest to deliver given a T-note futures price of 78.6075? (Assume that all bonds have semiannual coupon payments based on a par value of $100.)

a. 8.5-year bond with 8.5% coupons and a yield of 10%

b. 10-year bond with 5.5% coupons and a yield of 6%

c. 6.5-year bond with 3% coupons and a yield of 1.5%

Compute the Macaulay duration for a 12-year zero-coupon bond having a yield to maturity of 11.5%.

a. 12.39

b. 11.08

c. 12.00

d. 10.76

e. 11.83

Solution

Bond Price = C * ( 1- (1+r/2)^(-2*n))/(r/2) + FV/(1 + r/2)^(2n)

where C is coupon

r is interest rate

n is time to maturity

FV is face vlaue of bond

Bond Price of A = 91.5445

Bond Price of B = 96.2806

Bond Price of C = 109.2568

Cheapest to deliver = bond price - t notes future price

While performing substraction least value will be for Bond A so the correct answer is a.

Ans) Macaulay duration for zero - coupon bond is time to maturity so the correct option will be option C. 12.