wning a security with a guaranteed future sale price and date is (almost) 0 equivalent to a short-term investment extending to the sale date. Yet, in the Treasury bond futures market the prices seem too low to provide a fair rate of return to those who short T-bond futures. That is, the short term interest rate implicit in a long cash T-bondshort T-bond futures position is below the rep0 rate observed in the cash markets. Over the last several years, the difference between implied short-term interest rate (usually referred to as the implied rep0 rate) and the actual rep0 rate has been on the order of 250 basis points. In explaining this, market analysts have noted that there are two peculiarities in the bond delivery process which favor the individual who has the short position and cause bond futures to trade for less than their theoretical price.
The first of these peculiarities is what is often called the "wild card" or daily option on Treasury bond futures. During the delivery month the holder of a short position has until 9 p.m. (NY time) to notify the exchange of the intention to deliver.
The invoice price is calculated from the futures settlement price at 3 P.m. (NY time) on the day notice is given. Since the cash market is open until 5 p.m. (NY time), or two hours more, there is a possibility of buying cheaply late in the day and selling at the pre-established price. This possibility exists for these two hours each day during the delivery month.
The second delivery quirk is often called the implicit put option or "end of month" option which applies to the last seven business days of the delivery month. The authors would like to thank Martin Kratchman, Mark Landau, Glenn Picou and especially Scott Levy for greatly increasing our understanding of the delivery options, and David Emanuel and an anonymous referee of this Journal for helpful comments. We would also like to thank Robert K. Y. Chan, Raj Daryanani, Judy Jonson and Susan Ross for their excellent research and programming assistance. 'We say almost because if a coupon drop occurs during the holding period, the investment of the coupon sum does not have a guaranteed return.