Fixed Income Forward

A A A

DEFINITION

A contract to buy or sell a fixed income security, in the future, at a price agreed upon today. The price of a fixed income forward contract is calculated by subtracting the present value of coupon payments over the life of the contract from the bond price, and compounding this by the risk free rate over the life of the contract. The value of the contract is the bond price less the present value of coupons less the present value of the price that will be paid at expiration.

INVESTOPEDIA EXPLAINS

Investors use options contracts for fixed income securities in order to lock in a bond price now, while buying or selling the security itself in the future. The risk in holding fixed income forward contracts is that market interest rates for the underlying bonds can increase or decrease, which affects the bond’s yield and thus its price. Forward rates then become the focus of investor attention, especially if the market for the fixed income security is considered volatile.

Profiting from a fixed income forward depends on which side of the contract the investor is on. A buyer enters the contract hoping the market price of the bond will be higher in the future, since the difference between the contracted price and the market price represents profit. The seller hopes that the bond price will fall.

While the number of coupon payments for the life of the bond may exceed the life of the contract, only the payments during the contract period are considered. This is because some bonds will have maturities much longer than the duration of the contract, and contract participants are hedging for price movements over a shorter period of time.


RELATED TERMS
  1. Forward Contract

    A customized contract between two parties to buy or sell an asset at a specified ...
  2. Currency Forward

    A binding contract in the foreign exchange market that locks in the exchange ...
  3. Interest-Rate Derivative

    A financial instrument based on an underlying financial security whose value ...
  4. Weather Derivative

    An instrument used by companies to hedge against the risk of weather-related ...
  5. Derivative

    A security whose price is dependent upon or derived from one or more underlying ...
  6. Freight Derivatives

    A financial instrument's value that is derived on the future levels of freight ...
  7. Economic Derivative

    A relatively new form of derivative contract (the first ones were traded in ...
  8. Inflation Derivatives

    A subclass of derivative that is used by individuals to mitigate the effects ...
  9. Treasury Direct

    The online market where investors can purchase federal government securities ...
  10. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations ...
Related Articles
  1. Why Forward Contracts Are The Foundation ...
    Options & Futures

    Why Forward Contracts Are The Foundation ...

  2. The Barnyard Basics Of Derivatives
    Investing Basics

    The Barnyard Basics Of Derivatives

  3. Are Derivatives A Disaster Waiting To ...
    Options & Futures

    Are Derivatives A Disaster Waiting To ...

  4. The Alphabet Soup Of Credit Derivative ...
    Mutual Funds & ETFs

    The Alphabet Soup Of Credit Derivative ...

  5. Are Derivatives Safe For Retail Investors?
    Options & Futures

    Are Derivatives Safe For Retail Investors?

  6. How Companies Use Derivatives To Hedge ...
    Active Trading

    How Companies Use Derivatives To Hedge ...

  7. 5 Equity Derivatives And How They Work
    Options & Futures

    5 Equity Derivatives And How They Work

  8. Why do companies use reverse/forward ...
    Investing

    Why do companies use reverse/forward ...

  9. If a company moves its dividend record ...
    Investing

    If a company moves its dividend record ...

  10. Has Stock Bias Affected Your ETF Asset ...
    Bonds & Fixed Income

    Has Stock Bias Affected Your ETF Asset ...

comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center