1999
DOI: 10.21314/jcf.1999.030
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An investigation of cheapest-to-deliver on Treasury bond futures contracts

Abstract: It is commonly believed that the cheapest-to-deliver bond on a Treasury bond futures contract has extremal duration. The authors show that this is not always true. There is an easy rule for cheapest-to-deliver bonds which involves choosing a combination of extremal coupons and maturities. This rule is derived for a¯at term structure and its extension to a non¯at term structure is given.

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Cited by 11 publications
(3 citation statements)
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“…The CTD can change over time if there are changes in relative yield levels of the deliverable notes, if the shape of the yield curve changes, or if specific issues trade on special in the repo market. Benninga and Wiener (1999) show that in many cases, the CTD will be the deliverable note with the highest coupon rate when yields are lower than the five-year Treasury note future's notional coupon of six percent, and that under a flat term structure, the CTD has the shortest maturity of all deliverable notes when yields are lower than the five-year Treasury note future's notional coupon.…”
Section: A6 Computing the Balance Sheet Cost Measurementioning
confidence: 98%
“…The CTD can change over time if there are changes in relative yield levels of the deliverable notes, if the shape of the yield curve changes, or if specific issues trade on special in the repo market. Benninga and Wiener (1999) show that in many cases, the CTD will be the deliverable note with the highest coupon rate when yields are lower than the five-year Treasury note future's notional coupon of six percent, and that under a flat term structure, the CTD has the shortest maturity of all deliverable notes when yields are lower than the five-year Treasury note future's notional coupon.…”
Section: A6 Computing the Balance Sheet Cost Measurementioning
confidence: 98%
“…Starting in March 1995, long-term yields never exceeded 8% and plummeted to much lower levels at certain times. It is well known that when the yield curve is substantially lower than the reference coupon rate, bonds with the lowest durations are the most plausible contenders for CTD status (see, e.g., Benninga and Wiener 1999).…”
Section: An Alignment Of Four Concurrentmentioning
confidence: 99%
“…In particular, the issues of the performance of the conversion factor system, the identification of the cheapest-to-deliver bond as well as the valuation of the quality option embedded in Treasury-Bond futures contracts have been the subject of a substantial volume of research. A first stream of papers deals with the so-called conversion factor risk and its impact on the market, and proposes alternative conversion systems and rules for the identification of the CTD (see, for instance, Kane and Marcus 1984, Livingston 1984, Arak et al 1986, Benninga and Wiener 1999, Oviedo 2006, and Ben-Abdallah et al 2009. A second stream of papers proposes theoretical and empirical valuation approaches for the quality option, which is considered to be the most important, assuming a flat term structure for interest rates.…”
Section: Introductionmentioning
confidence: 99%