The basic characteristics of a forward contract on a bond are very much like those of equity. A bond pays a coupon similar to an equity paying a dividend. The differences are:
· Bonds mature
· Bonds can have calls and convertibility.
· Bonds have a default risk
Forward contracts can be on an individual issue as well as on a portfolio of bonds or on a bond index.
Zero-coupon bond forward contract
Agreeing to buy the bond at a later date, but before its maturity, at specified price.
sold at a discount to par and are quoted in terms of the discount rate.
Coupon-paying bond forward contract
Interest payments of the bond are typically semi-annual and can sell at a premium or discount to the bond's par value.
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