Explore conversion factors, delivery invoices and cheapest-to-deliver economics.
Treasury bond futures can be settled by delivering any bond from a basket. Conversion factors put the bonds on a common footing, the invoice price determines what the buyer pays, and the seller delivers the cheapest-to-deliver bond. This lab shows conversion factors, invoice prices and deliverable cash flows, and how the cheapest-to-deliver bond switches as yields move.
The deliverable bond that is cheapest for the futures seller: the one with the lowest cost of buying it relative to the invoice amount received, i.e. the highest implied repo return.
Conversion factors are computed at a fixed notional yield. When market yields move away from it, bonds with different durations gain or lose relative value, so a different bond becomes cheapest.