Calculating U.S.Treasury Futures Conversion Factors

Interest rate resource center tooLs & anaLYtIcs

caLcuLatInG u.s. treasurY Futures conVersIon Factors

Every cash note or bond that is eligible for delivery into a Treasury futures contract has a conversion factor that reflects its coupon and remaining time to maturity as of a specific delivery month. A conversion factor is the approximate decimal price at which $1 par of a security would trade if it had a six percent yield-to-maturity. A common misconception is that the DV01 of a Treasury security remains fixed as the yield of the instrument changes. In truth, the price-yield relationship of a Treasury security is nonlinear; as yields fluctuate, the DV01 of a Treasury security changes.

a bond’s conversion factor is defined as: factor = a x [ ( coupon/2) + c + d ] – b where factor is rounded to four decimal places, and: coupon n z v = { z……if z < 7 a = 1/1.03v / 6 b = ( coupon/2 ) x ( 6 – v ) / 6 c = { 1/1.032n..…… if z < 7 or { 1/1.032n + 1..…… if otherwise d = ( coupon/0.06 ) x ( 1 – c ) is the bond’s annual coupon in decimals. is the number of whole years from the first day of the delivery month to the maturity (or call) date of the bond or note. is the number of whole months between n and the maturity (or call) date rounded down to the nearest quarter for the 10-Year u.s. treasury note and 30-Year u.s. treasury Bond futures contracts, and to the nearest month for the 2-Year, 3-Year and 5-Year u.s. treasury note futures contracts. or { 3……if z ≥ 7 (for us and tY)1 or { ( z – 6 )……if z ≥ 7 (for tu, 3Yr, and FV)2

Available from the Interest Rate Resource Center at www.cmegroup.com/ircenter: U.S. Treasury Futures Conversion Factor Tables and U.S. Treasury Futures Conversion Factor Calculator. In addition, to learn more about Treasury futures invoice pricing and the Treasury futures delivery process, please refer to the brochure U.S. Treasury Futures Delivery Process, also available from the Interest Rate Resource Center.

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