If a 16-year 12 percent semi-annual $100,000 T-bond, currently yielding 10 percent, is used to deliver against a 20-year, 8 percent T-bond at 114-16/32, what is the conversion factor? What would the buyer have to pay the seller?
A)1.158; $132,591.
B)1.156; $115,600.
C)1.150; $131,284.
D)1.102; $124,200.
E)1.000; $114,160.

Question

Quizplus · Accepted Answer

The conversion factor is calculated as follows:
Conversion factor = (Present value of bond's cash flows at 8% / Present value of bond's cash flows at 10%) = ($91.49 / $79.05) = 1.158
The buyer would have to pay the seller:
Bond price = Conversion factor x Bond's price quote
Bond price = 1.158 x $114,812.50 = $132,591.

If a 16-Year 12 Percent Semi-Annual $100,000 T-Bond, Currently Yielding