On January 30, 2012, the Darden Company is considering two T-bonds as potential bonds for delivery against the June 2012 T-bond futures contract. The contract's current price is 102 8/32.
The first bond has a coupon rate of 7 ¼ percent and matures on May 15, 2036. It has a current market price of 105.00.
The second bond has a coupon rate of 5 ¾ percent and matures on May 15, 2034. It has a current market price of 87.00.
The June contract expires on June 15th and the settlement price on June 15th is 114.00. The reinvestment rate available to the Darden Company is 3 percent.
Determine which bond would be the cheapest-bond-to-deliver.