Question

what is the par value of treasury bond futures?

Answer 1

Treasury futures are standardized contracts for the purchase and sale of U.S. government notes or bonds for future delivery. The U.S. government bond market offers the greatest liquidity, security (in terms of credit worthiness), and diversity among the government bond markets across the globe. The U.S. government borrows through the U.S. bond market to finance its maturing debt and its expenditures.

The U.S. government borrows money primarily by issuing bonds and notes for a fixed term, e.g. 2-year, 5-year, 10-year, and 30-year terms at fixed interest rates determined by the prevailing interest rates in the marketplace at the time of issuance of the bonds. Strictly speaking, U.S. Treasury bonds have original maturities of greater than 10 years at time of issuance, and U.S. Treasury notes have maturities ranging from 2-Yrs to 10Yrs (2, 3, 5, 7 and 10yr). For the purpose of this note, U.S. Treasury bonds and notes are applicable for general references to the U.S. bond market or U.S. bonds unless described otherwise.

U.S. Treasury bonds trade around the clock leading to constant price fluctuations. In general, bond prices move in inverse proportion to interest rates or yields. In a rising rate environment, bondholders will witness their principal value erode; in a declining rate environment, the market value of their bonds will increase.

IF Yields Rise ▲ THEN Prices Fall ▼
IF Yields Fall ▼ THEN Prices Rise ▲

Treasury futures are derivatives that track the prices of specific Treasury securities.

To go long a Treasury futures contract is to agree to take delivery of the underlying securities at the price at which you went long (adjusted for differences between various deliverable bonds). Because Treasury futures (like other futures contracts) go up and down with their underlying assets, you would go long Treasury futures for the same reason you would buy the underlying Treasuries: You expect the underlying Treasuries to go up in price. Buyers and sellers of Treasury futures don't know any more than investors in the underlying securities do about where Treasury prices and interest rates are headed.

You would not buy Treasury futures if your objective was to earn income from coupon payments. Interest rate futures do not make interest payments.

Buying and selling futures is both more efficient and riskier than buying and selling the underlying securities because it employs leverage. To buy $100,000 par amount of Treasuries, you have to lay out something close to that amount, depending on the price. But to go long a Treasury futures contract representing $100,000 par amount of Treasuries, you merely have to deposit $2,025 in a margin account, and maintain at least $1,500 in the account, as changes in the value of the contract are either added to or subtracted from it.