Understanding Bond Futures
What are Bond Futures? Bond futures are financial contracts that obligate the buyer to purchase and the seller to sell a specified quantity of a bond at a predetermined price on a specified date in the future. The price of a bond future is determined by the price of the underlying bond, as well as by factors such as interest rates, credit ratings, and supply and demand. Bond futures are traded on futures exchanges, such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). They are typically used by investors to hedge against interest rate risk, speculate on future interest rate movements, or gain exposure to the bond market without actually owning any bonds. How do Bond Futures Work? For example, an investor might buy a 10-year Treasury bond future with a delivery date of one year from now. If the price of the underlying 10-year Treasury bond goes up by 1% in the next year, the investor will make a profit on their bond future contract. However, if the...