Conversion factor

In bond futures, the adjustment that puts each deliverable bond on a par with the contract's notional bond. The invoice price is the futures price times it, plus accrued interest.

Where you will meet it

Conversion factor appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain the pricing of fixed-income forwards and futures, and work out their no-arbitrage value and say what it means
  CFA Level II · Derivatives and Risk Management

  “Compound the full price to delivery, subtract the future value of coupons received before then and the accrued interest at delivery, and, for futures, divide by the delivered bond's conversion factor, so the quoted futures price is F0 = [(B0 + AI0) × (1 + r)^T − AIT − FV of coupons] ÷ CF.”

• Show how interest rate futures, forwards and swaps can reshape the risk and return of a portfolio
  CFA Level III · Derivatives and Risk Management

  “Futures needed = (target BPV − portfolio BPV) ÷ futures BPV, where futures BPV is roughly the cheapest-to-deliver bond's BPV ÷ its conversion factor.”

See also

Accrued interest

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with C · Glossary