"simple" explanation for 10 yr treasury note future pricing

Discussion in 'Financial Futures' started by scriabinop23, Sep 10, 2006.

  1. anyone have a simple explanation for how ZN DEC 06 is priced at 107'030 (107 6/32) ?

    obviously not the same or even remotely close to the 10 year treasury price of 100-24/32 (eg bloomberg )

    10 Year 4.875 08/15/2016
    100-24+ / 4.77 0-03 / -.012 09/08
  2. Surdo


    Last sale on eCBOT is 107 '03.5
    It closed in the pits on Friday@ 107 '05.5.
  3. Pabst


    What does that have to do with the question posed by this thread?
  4. Pabst


    The coupon on the current ten year Treasury Note 4.875

    The coupon on ZN, the ten year Treasury Futures Contract is 6%.

    Thus even at a similar implied yield the price between the two is different.
  5. Surdo


    Why don't you answer the question then WISEASS?

    He is looking at the "Cash" price vs the Dec futures contract!
  6. Pabst


    Already did. Chump.:)
  7. lets get a little more in depth here. simplified:

    if I buy 3% coupon bond for 100, then yield is 3%. If I buy 3% 1 yr coupon bond for 90, then yield is 13%.

    So if coupon on 10 yr ZN is 6% and I buy it for 100. Then effective yield is 6%. If I buy it for 107 (with 1 yr maturity) ... then effective yield is -1% (107 - 6 coupon - 100 par value returned). Now I assume my mistake here is that 10 yr treasury has more than one year to maturity, so this factors into pricing. Please help provide formulas so I can have a complete understanding. I didn't add in accrual, but this must be a small portion, right? (at most 1/2 of annual coupon of 4.875)

    Not making sense yet. Please help fill in the gaps for bond/note newbie. Now probably very clear why I originally asked the question.

    I saw ecBOT's explanation:


    U.S. Treasury notes maturing at least 6 1/2 years, but not more than 10 years, from the first day of the delivery month. The invoice price equals the futures settlement price times a conversion factor plus accrued interest. The conversion factor is the price of the delivered note ($1 par value) to yield 6 percent.

    --- What is "invoice price"? I assume settlement price is the traded price on the exchange? And when is interest accrued from ?

    My logic: a futures contract expiring 3 months from now with a coupon (and thus yield since par value=100) of 6% would have accrued interest of 1.5% and remaining interest of 1.5% (underlying note paying twice a year). So lets say par is 100, then value of the note would be 101.50. Correct?

    I'm looking for something like:

    future price = 10 yr note par value (underlying) + accrual + x ...

    But that only gets us to something like 102 or 103, not 107.
  8. Pabst


    This will help you compute. Crude but you'll get the idea.


    Think of this as the logic. If yields are 5% then how much would you pay over par to recieve a 6% coupon? Even though I was a local in the Bond pit I'm not a math wiz so "walking" you through is difficult for me. I'm sure SOMEONE here is well versed enough on convexity to explain in layman terms.

    Try this article.

  9. thanks. i'll learn this... but it looks like time to maturity is the factor I wasn't quite grasping.
  10. Buy a copy of Galen Burkhardt's book, "Treasury Bond Basis". A fixed income futures price has three components: Cash bond price, Repo rate, and Conversion factor. Using the formula given in the book you can take the futures price, repo rate, and CF and convert them to a cash price, and vice versa.

    Buy the Bond Basis book and read it cover to cover. That will put you on the same page as the bond guys.
    #10     Sep 10, 2006