Fixed Income Forward

Filed Under: ,
Dictionary Says

Definition of 'Fixed Income Forward'


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 Says

Investopedia explains 'Fixed Income Forward'


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.

comments powered by Disqus
Hot Definitions
  1. Closed-End Fund

    A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
  2. Payday Loan

    A type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash.
  3. Securitization

    The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors.
  4. Economic Forecasting

    The process of attempting to predict the future condition of the economy. This involves the use of statistical models utilizing variables sometimes called indicators.
  5. Chicago Mercantile Exchange - CME

    The world's second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and agricultural products.
  6. Private Equity

    Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
Trading Center