FIXED INCOME FORWARD

A contract to buy or sell a fixed income security, in the future, at a price agreed upon today. The price of a fixed income forward contract is calculated by subtracting the present value of coupon payments over the life of the contract from the bond price, and compounding this by the risk free rate over the life of the contract. The value of the contract is the bond price less the present value of coupons less the present value of the price that will be paid at expiration.