Bond futures contracts allow the seller to fulfill delivery obligations with one of the different bond issues, which fits the delivery standards of each contract. The price of each deliverable bond will be calculated through the use of a conversion factor.
The conversion factor is based on a pure mathematical net present value calculation that allows for the comparison of the deliverable bonds (with their varying coupons and maturities) on a common basis, the notional coupon.
When the government yield to maturity is higher than the notional coupon of a bond futures, the conversion factor calculation tends to slightly favor the delivery of relatively low-coupon, long-maturity securities. Conversely, when yields are lower than the notional coupon, high-coupon, short-maturity issues may become cheapest to deliver.
The list of deliverable two-, five-, ten- and 30-year Government of Canada bonds and their conversion factor are published monthly through Montréal Exchange's circulars.