Bond Futures

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Definition of 'Bond Futures'

A bond future is a financial contract that obligates the seller to deliver a specified quantity of bonds at a predetermined price on a specified date. The buyer of the contract agrees to pay the seller the agreed-upon price on the delivery date. Bond futures are traded on organized exchanges, such as the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (NYMEX).

Bond futures are used by investors to hedge against interest rate risk. For example, an investor who owns a bond may buy a bond future to lock in a selling price for the bond in the future. This protects the investor from the possibility of interest rates rising and the value of the bond falling.

Bond futures are also used by speculators to profit from changes in interest rates. For example, a speculator who believes that interest rates are going to fall may buy a bond future. If interest rates do fall, the value of the bond future will increase, and the speculator will make a profit.

Bond futures are a complex financial instrument and should only be traded by experienced investors. There is a high risk of loss associated with trading bond futures, and investors should carefully consider their investment objectives and risk tolerance before entering into a futures contract.

Here are some additional details about bond futures:

* Bond futures are typically quoted in terms of the bond's yield to maturity. The yield to maturity is the interest rate that an investor would earn if they held the bond until maturity.
* Bond futures are priced based on the prevailing interest rate environment. If interest rates rise, the price of bond futures will fall, and vice versa.
* Bond futures are settled in cash on the delivery date. The seller of the contract delivers the bonds to the buyer, and the buyer pays the seller the agreed-upon price.
* Bond futures are used by a variety of market participants, including investors, hedge funds, and banks.

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