Uses[ edit ] Interest rate futures are used to hedge against the risk that interest rates will move in an adverse direction, causing a cost to the company.
When a bond is issued, investors purchase the bonds, and in effect, act as lenders to the issuing entity. The investors earn a return in the form of coupon payments made annually or semi-annually throughout the life of the bond. When the bond maturesthe bondholder is repaid an amount equal to the face value of the bond.
If a corporate bond is issued at a discountthis means investors can purchase the bond below its par value. But not all bonds have coupon payments.
Such bonds are referred to as zero coupon bonds. These bonds are issued at a deep discount and repaid the par value at maturity. The payment received by the investor is equal to the principal invested plus the interest earned, compounded semiannually, at a stated yield.
There exist coupon paying bonds and zero-coupon bonds. The latter are also called discount bonds. Interest rates and bond prices depend on their maturity. all the zero coupon bond prices at t. Similar to a forward rate agreement, an interest rate futures contract. An interest rate future is a financial derivative (a futures contract) with an interest-bearing instrument as the underlying asset. It is a particular type of interest rate derivative.. Examples include Treasury-bill futures, Treasury-bond futures and Eurodollar futures.. The global market for exchange-traded interest rate futures is notionally valued by the Bank for International Settlements. Treasury Bond Futures 2 Basic Futures Contract In a basic futures contract without delivery options, the buyer agrees to take delivery of an underlying asset from the seller at a specified expiration date T. Associated with the contract is the futures price, G(t), which .
The interest earned on a zero-coupon bond is an imputed interestmeaning that it is an estimated interest rate for the bond, not an established interest rate. So, although no coupon payments are made on zero coupon bonds until maturity, investors may still have to pay federal, state, and local income taxes on the imputed or phantom interest that accrues each year.
Purchasing a municipal zero coupon bond, buying zero coupon bonds in a tax-exempt account, or purchasing a corporate zero coupon bond that has tax-exempt status are a couple of ways to avoid paying income taxes on these securities.
Calculating Price The price of a zero coupon bond can be calculated as: The greater the length of time until the bond matures, the less the investor pays for it, and vice versa.
The maturity dates on zero coupon bonds are usually long term, with many having initial maturities of at least 10 years. Investors can choose zero coupon bonds that are issued from a variety of sources, including the U.
Most zero coupon bonds trade on the major exchanges.The interest earned on a zero-coupon bond is an imputed interest, meaning that it is an estimated interest rate for the bond, not an established interest rate. For example, a bond with a face.
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Financial, Stock/Share Market, Personal Finance and Investing Definitions and F&Q. Bond futures are financial derivatives which obligate the contract holder to purchase or sell a bond on a specified date at a predetermined price.
A bond future can be bought in a futures exchange. Interest is the rent paid on a loan. A bond is the securitized form of a loan.
There exist coupon paying bonds and zero-coupon bonds. The latter are also called discount bonds. Interest rates and bond prices depend on their maturity. The term structure is the function that maps the maturity to the corresponding interest rate or bond price.