Parties with short positions in bond futures contracts usually have many choices to make with respect to making delivery of underlying bonds. These choices vary across coupon payments and maturities. The party with the short position can choose the less costly bond to deliver from among deliverable bonds. The cheapest-to-deliver (CTD) bond is one which makes the following differential at its minimum:

Quoted bond price – (most recent settlement price × conversion factor)

The party with the short position would receive:

(most recent settlement price × conversion factor) + accrued interest

On the other hand, the cost of purchasing the bond on that party is:

Quoted bond price + accrued interest

By combining the proceeds with the cost, we get the differential that needs to be minimized. In order to deliver, the party with the short position can determine the cheapest-to-deliver bond from among different bonds available.

For an example, see: cheapest-to-deliver bonds- a numerical example.