Quote from 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.
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:
http://www.ecbot.com/cbot/pub/cont_detail/0,3206,1520+14433,00.html
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.
