Rates Equities and Portfolio Forwards · Forwards Trading Guide

A bond forward refers to a specified future bond transaction. Coupons, accrued interest and financing terms make its price different from a simple spot quote.

Specify the deliverable security

Record the issuer, identifier, currency, principal amount, coupon schedule and delivery date. A forward on one named bond differs from an exchange future with a deliverable basket. Credit quality and liquidity remain important. A rise in interest rates can reduce the underlying bond’s value, while a change in issuer credit spreads can create an additional move.

Start from the cash price

Bond markets often quote a clean price excluding accrued interest, while the dirty price includes it. The cost of buying the bond today is based on the relevant full cash amount. A carry calculation subtracts the present value of coupons received before forward delivery, then finances the remaining amount to that date. The resulting delivery value may need conversion back to a clean quotation by subtracting accrued interest at delivery.

Use a controlled example

Assume a hypothetical bond has a dirty price of 102 per 100 principal. The present value of coupons before delivery is 1.50, and the funding growth factor is 1.02. The simplified dirty forward is (102 minus 1.50) × 1.02 = 102.51. If delivery accrued interest is 0.75, the corresponding clean forward is 101.76. These inputs are chosen only to explain the calculation.

Separate rate risk from other risks

Duration estimates how a bond price responds locally to yield changes. It does not capture every credit, liquidity or curve effect. A hedge using a different bond can leave material residual exposure even if the durations match. Check coupon dates, repo or funding assumptions and delivery conventions before attributing a pricing difference to an opportunity.

Try it yourself

An illustrative dirty forward price is 104.20 and accrued interest on delivery is 1.10. What is the clean forward quotation?

Show the worked answer

103.10 per 100 principal. The clean quotation removes delivery accrued interest from the full delivery price.

Further reading

Educational material. Numerical examples are hypothetical and exclude costs unless stated. Forward contracts create binding obligations and may require collateral or credit approval. Actual terms, access and risks depend on the agreement and jurisdiction.

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