Question

3 what are the conditions (bond features) for deliverable bonds in a Treasury bond futures contract?

Answer 1

Solution: The Condition and Features for Deliverable bonds in a Treasury Bond Futures Contract:

When the economy strengthens, interest rates are likely to rise for a number of reasons such as:

• increased demand for loans
• asset allocation out of bonds (typically considered a safe asset class) into stocks (typically considered a risky asset class)
• increased likelihood of interest rate increases by the Federal Reserve Board

When interest rates rise, Treasury futures prices fall.

Similarly, when the economy weakens, interest rates are likely to fall for reasons such as:

• decreased demand for loans
• asset allocation out of stocks into bonds
• increased likelihood of interest rate cuts by the Federal Reserve Board.

2. Bond Features and Key Takeaway:

• Bond futures are contracts that entitle the contract holder to purchase a bond on a specified date at a price determined today.
• A bond future can be bought on a futures exchange based on a variety of underlying bond instruments.
• Bond futures are used by speculators to bet on the price of a bond or else to hedge a bond portfolio.
• Bond futures indirectly are used to trade or hedge interest rate moves.