What are bond futures?

Bonds are debt instruments used by the Government or companies to raise money for a set period of time, in exchange for regular interest payments. Once the bond reaches maturity, the bond issuer returns the money to the investors.

Mr.Kohli lends to his friend Mr. Sharma ₹1 lakh @ 12% interest for a period of 3 years. Mr. Sharma will be able to return the principal amount of ₹ 1 lakh to Mr. Kohli only after 3 years. So Mr. Sharma pays him annualized interest of 12% on the principal amount every year. This is Mr. Kohli's incentive for providing the loan. This is exactly how a bond works.

Futures contracts are derivative contracts that derive their value from their underlying assets.  Any changes in the price of the underlying will be reflected in the price of that corresponding derivative.

What are bond futures?

Bond futures are futures contracts that derive their value from the underlying Bond. Bond futures come under Interest Rate Derivatives in India. 

Currently, Interest Rate Derivatives segment of NSE offers two instruments i.e. (NBF II) and  (91DTB).

• NBF II

1. The NSE Bond Futures II (NBF II) contracts are available for trading based on Government of India (GOI) security of face value 100 with semi-annual coupon and residual maturity between 4 and 8 years, 8 and 11 years and 11 and 15 years on the day of expiry of the contract.
2. These are considered to be long term financial instruments when the duration of investment exceeds 3 years.

• 91DTB

1. 91DTB refers to the Government of India Treasury Bill which matures after 91 days. 
2. These are considered to be short term financial instruments as the duration of investment is only 91 days.

Currently NBF II based on Government of India Security with 6 year, 10 year and 13 year maturity as well as Government of India Treasury Bill with 91-day maturity are available for trade.

Bond futures pricing

• 91DTB

• • 91DTB are issued at discount and settled at face value on maturity. Here no coupons are involved.

• Bond futures example: 91DTB

Let's understand this with the help of an example. 91 DTB with the face value of ₹100/- is issued at a discount of ₹97/-. The difference between the maturity value or the face value (that is Rs.100) and the issue price will be earned by the investor. In this case it is ₹3/-.

• NBF II

• NBF are essentially bonds with intermediate coupons i.e. quarterly or semiannual interest payments are paid on the borrowed principal amount.

• Bond futures example: NBF II

Let's understand this with the help of an example. On the exchange you see the symbol : 768GS2023.

• The symbol shall denote coupon, type of bond and maturity year. Here, it means that 768GS2023 stands for 7.68% Central Government Security having maturity on December 15, 2023. 

• So the underlying on which the futures contracts are based : 7.68% Central Government Security having maturity on December 15, 2023.
• Daily Mark-to-Market Settlement: T+1 in cash based on daily settlement price.
• Final settlement: T+1 day in cash based on final settlement price.
• Daily Settlement Price refers to the Volume Weighted Average Futures Price of the last half an hour across exchanges or Theoretical price.
• Final Settlement Price refers to the weighted average price of the underlying bond based on the prices during the last two hours of the trading on NDS-OM. If less than 5 trades are executed in the underlying bond during the last two hours of trading, then FIMMDA price shall be used for final settlement.

Where are Bond Futures traded?

NSE's automated screen based trading  called 'National Exchange for Automated Trading' (NEAT) is a fully automated screen based trading system, which adopts the principle of an order driven market used for trading in Bond Futures.