Please Explain in detail how you got the answer the correct

Please Explain in detail how you got the answer the correct answer is A

Which of the following bonds would be cheapest to deliver given a T-note futures price of 79.2629? (Assume that all bonds have semiannual coupon payments based on a par value of $100.)

6.5-year bond with 4% coupons and a yield of 3.5%

7-year bond with 9% coupons and a yield of 10.5%

8.5-year bond with 4.5% coupons and a yield of 5.5%

6.5-year bond with 4% coupons and a yield of 3.5%

Please Explain in detail how you got the answer the correct answer is A Which of the following bonds would be cheapest to deliver given a T-note futures price of 79.2629? (Assume that all bonds have semiannual coupon payments based on a par value of $100.)

Selected Answer: c. 6.5-year bond with 4% coupons and a yield of 3.5% Answers: a. 7-year bond with 9% coupons and a yield of 10.5% b. 8.5-year bond with 4.5% coupons and a yield of 5.5% c. 6.5-year bond with 4% coupons and a yield of 3.5%

Solution

Correct option is > a. 7-year bond with 9% coupons and a yield of 10.5%

The following is the working of each the bonds, the lowest price calculated for option a. working which is $926.93. It is lowest than all hence cheapest to deliver bond. One should by it from market for delivering.

Using financial calculator BA II Plus - Input details:

a.

b.

c.

I/Y = Rate or yield / frequency of coupon in a year =

5.25

2.75

1.75

PMT = Payment = Coupon / frequency of coupon =

-$45.00

-$22.50

-$20.00

N = Total number of periods = Years x frequency of coupon =

14

17

13

FV = Future Value =

-$1,000.00

-$1,000.00

-$1,000.00

CPT > PV = Bond Value =

$926.93

$932.82

$1,028.84