Fixed Income Forward Contracts

A fixed income forward contract is an agreement between two parties to buy a pre-specified number of a fixed income security at a given price at a given date.

The formulas for pricing and valuing fixed income forward contracts are similar to that of equity forward contracts, simply replace stock price with bond price (including accrued interest) and dividend payment with interest coupon payment.

Price at initiation: F(0,T) = (S0 - PV(coupon pmts over contract life))(1+r)T

Value at time "t": Vt(0,T) = St - PV(coupon pmts remaining in contract life) - PV[F(0,T)]