Because it is physical delivery, and the coupon rate and maturity of deliverable bonds are different from those of treasury bonds futures standard bonds, a basket of deliverable treasury bonds must be standardized separately before delivery, so the conversion coefficient is introduced. The Exchange will announce the conversion factor (CF) of each deliverable bond relative to the treasury bond futures contract of each term, and the CF will remain unchanged during the delivery cycle, so investors do not need to calculate it.
When treasury bonds are used to deliver treasury bonds contracts, the buyer of treasury bonds futures pays the invoice price to the seller. The invoice price is equal to the futures settlement price multiplied by the conversion coefficient of the current bond selected by the seller to the corresponding futures contract, plus any accrued interest on the bond.
In the whole set of deliverable treasury bonds, the cheapest deliverable treasury bonds are purchased treasury bonds, which are held until the delivery date to maximize the net income of actual delivery. In most cases, the reliable way to find the cheapest national debt for delivery is to find the national debt with the highest implied repo rate.
According to the principle of no-arbitrage pricing, the futures price of treasury bonds is equal to the spot price of treasury bonds plus financing cost MINUS the coupon interest income of treasury bonds. Under the normal term structure of interest rate, the short-term interest rate is generally lower than the medium-and long-term interest rate, so the financing cost of national debt is generally lower than the coupon interest of the national debt held, and the national debt futures contract usually shows a discount.