Question

An investor sells one T-Bond futures contract when the quoted price was 95-12. Three months later, when the position was closed out, the T-Bond futures price was 94-16.

A. What was the gain or loss on this futures contract?

B. Did interest rates increase or decrease over this period? How do you know?

Answer 1

Tic Size of T-Bond Futures contract = $31.25, One thirty second (1/32) of one point.

Contract unit = $100,000

Quote: Points and fractions of points with par on the basis of 100 points Now, Selling price = 95-12 = 95+(12/32) = $95.375 Buying Price (Price at which position was squared off) = 94-16 = 94 + (16/32) = $94.50 a) Total Profit will be = (95.375-94.5)*1000 = $875

b) Interest rate will go up, as bond prices went down.

Reason: A key factor governing the performance of bonds in the market is the relationship of interest rate (IR) and price movement. In general, as IR increases, bond prices will decline; as IR decline, prices rise.