How is cash value calculated per market value of an OTR bond?

The calculation of cash value per market value of an on-the-run (OTR) bond often refers to how we prorate the cash flows or the value based on the time remaining until the next coupon payment and considers the market conditions affecting the yield spread.

The correct choice, which involves the formula $100 times (number of days x special spread) divided by 360, is appropriate because it effectively determines the accrued interest on a bond based on its special spread and the number of days until the next coupon payment. The special spread reflects the yield premium or discount associated with the bond compared to the benchmark, and dividing by 360 is a common practice for bond market calculations to annualize it based on a typical year length used for money market calculations.

By multiplying this outcome by $100, we align the result with unit values typical for bond pricing, which are commonly referenced in terms of $100 face value. This method ensures that the calculation is directly tied to the present value of a bond, which is crucial for assessing its cash value in the market accurately.

Other formulas do not properly account for both the time value of money and the specific yield adjustments necessary in bond pricing, which can lead to inaccurate valuations.