Futures and Bonds Pricing and Contract Terms
How are bond futures priced?
The price of bond futures can be calculated on the expiry date as: Price = (bond futures price x conversion factor) + accrued interest.
What is a bond futures contract?
A Bond Future is a contractual obligation for the contract holder to buy or sell a Bond on a specified date at a predetermined price. The buyer (long position) of a Bond Future is obliged to buy the underlying Bond at the agreed price on expiry of the future.
What determines the price of a futures contract?
A futures price is determined by the cost of its underlying asset and moves in sync with it. The cost of futures will rise if the cost of its underlying increases and will fall as it falls. But it is not always equal to the value of its underlying asset. They can be traded at different prices in the market.
What is a futures contract in simple terms?
A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange.
What is the bond pricing rule?
A series of spot rates must be calculated to price a coupon paying bond – each cash flow must be discounted using the appropriate spot rate, such that the sum of the present values of each cash flow equals the price.
How do you hedge a bond with futures?
Hedging a bond portfolio with futures contracts will be done by holding short positions. The performance of the hedge is based on the changes in value of both the futures account and the bond portfolio.
What is the duration of a futures contract?
Duration: As in the case of stock futures, index futures too have three contract series open for futures trading at any point in time – the near-month (1 month), middle-month (2 months) and far-month (3 months) index futures contracts.
Which bond delivery is cheapest?
What Is Cheapest to Deliver?
- Cheapest to deliver is the cheapest security that can be delivered in a futures contract to a long position to satisfy the contract specifications.
- It is common in Treasury bond futures contracts.
What is duration of a future?
Thus, we can calculate the duration of a futures contract directly by dividing the percentage change in the futures price by the change in the yield of one of the underlying bonds.
What are the types of futures contracts?
The different types of futures contracts include equity futures, index futures, commodity futures, currency futures, interest rate futures, VIX futures, etc. The concept across all the types of futures is the same. They are all a contract between a buyer and seller for delivery at a future date.
What is the difference between a future and forward contract?
A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter. A futures contract has standardized terms and is traded on an exchange, where prices are settled on a daily basis until the end of the contract.
What are examples of futures?
Futures contracts can be bought and sold on practically any commodity or financial asset. There are futures contracts for corn, soybeans, sugar, oil, gold, silver, the S&P 500, interest rates, and pretty much any other financial instrument you can think of.
What are the 5 types of bonds?
There are five main types of bonds: Treasury, savings, agency, municipal, and corporate. Each type of bond has its own sellers, purposes, buyers, and levels of risk vs. return. If you want to take advantage of bonds, you can also buy securities that are based on bonds, such as bond mutual funds.
What factors affect the price of a bond?
3 factors that affect bond prices
- Interest rates. In general, when interest rates rise, bond. They use the money to run their operations. …
- Inflation. In general, when inflation. This means a dollar can buy fewer goods over time. …
- Credit ratings. Credit rating.
How do you quote bond prices?
Bonds are generally quoted as percentage of face value ($1,000). For example, a bond selling at 950 would be selling at 95% of its face value – and would therefore be quoted at 95. “The 2 year US Treasury jumped 10 basis to 2.12% yield.”
Why are bond prices divided by 100?
Bond Price Conventions
A bond’s price multiplied by the bond factor — the value at maturity divided by 100 — equals the amount you will actually pay for the bond. For example, a bond with a price of 100 and a factor of 10 will cost $1,000 to buy, omitting commission. A price of 100 is called par.
What is bond price and yield?
A bond’s yield is the discount rate that can be used to make the present value of all of the bond’s cash flows equal to its price. In other words, a bond’s price is the sum of the present value of each cash flow. Each cash flow is present-valued using the same discount factor. This discount factor is the yield.
Why do bond prices change?
Essentially, the price of a bond goes up and down depending on the value of the income provided by its coupon payments relative to broader interest rates. If prevailing interest rates increase above the bond’s coupon rate, the bond becomes less attractive.
What happens when bond prices fall?
Key Takeaways. Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
Why do bond prices fall?
Essentially, the price of a bond goes up and down depending on the value of the income provided by its coupon payments relative to broader interest rates. If prevailing interest rates increase above the bond’s coupon rate, the bond becomes less attractive.