Fixed Income Forward

Posted in Finance, Accounting and Economics Terms, Total Reads: 1255

Definition: Fixed Income Forward

Fixed income forward is a documentation which allows an investor to sell or purchase a fixed income security, where the price is set as fixed which is present as on the current date.

The forward contracts presents a risk in holding securities as their value is volatile with the market interest rates and Bond’s yield and price will also change. So the Forward interest rates are always a matter of concern for any investor.

The price is calculated as below:

Price of forward contract = Bond price - present value of the coupon payments compounded by the risk free rate over the contract

A fixed income contract can be profitable for both buyer and seller at different times depending on the change in the interest rate. Every buyer assumes that buying the bond now at a lower price would reap more benefits if the price of the bond increases. In this case, the profit would be the market price minus the contracted price. By the same logic, the seller will benefit if the bond price falls and he enters into contract with such anticipation.

The number of coupon payments for the fixed income security might be higher than the bond life period. The valuation is done only considering the contract period coupon payments. The investors entering into the contract are concern only about hedging the risk for the contract period only.

Hence, this concludes the definition of Fixed Income Forward along with its overview.

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