A bond is a debt security, in many ways similar to an I.O.U. Bonds are issued by a government or corporation to raise money to pay for public spending. Governments pay a fixed rate of interest every year and so bonds' capital value will rise and fall depending on the short-term changes in local interest rates. The spread betting guide prices can be affected by interest rate changes, currency movements and changes in the economic situation of the issuing country.
To trade Interest Rates from home, the cheapest and simplest brokers are CFD and spreadbet companies. I particularly rate FinSpreads Interest Rate Trading
Often individual government bonds are known by shortened names, eg British government bonds are known as "Gilts", US government bonds as T-Bonds and German government bonds as Bunds.
We will call you Arthur Dent, with the following account details:
Example: Arthur Dent
| Acct Balance: |
£2,000 |
| Credit allocation: |
£0 |
| Required margin: |
£0 |
| Open P&L: |
£0 |
| Total |
£2,000 |
You call the Spread Betting trading desk (or log on to the site) and ask for a quote on the short sterling future for March. The actual March short sterling future in the market is trading at 95.21 - 95.23.
We quote a March short sterling spread of 95.20 - 95.24.
Our quote implies that by the third Wednesday of the current quarter, interest rates will be between 4.76% and 4.80%. This spread is calculated by taking 100 basis points minus what the market makers believe interest rates will be at the time of expiry, ie 100 minus 95.20 and 100 minus 95.24.
What you do next:
Thinking that interest rates will indeed rise, you decide to sell the short sterling future at 95.20 for £10 per tick (on this market 1 tick = 0.01).
To place a bet, you must have sufficient funds on account to cover the initial margin (deposit). In this case,the initial margin is charged at a fixed rate multiplied by the stake, ie 50 x £10 = £500. All or part of the margin requirement is removed from your account when the position is full or part closed respectively.
Account status after opening the position:
Example: Arthur Dent
| Acct Balance: |
£2,000 |
| Credit allocation: |
£0 |
| Required margin: |
£-500 |
| Open P&L: |
£0 |
| Total |
£1,500 |
Our current quote on the short sterling future for June is 95.60 - 95.64 (this implies that interest rates will be between 4.36% and 4.40%).
Result:
Having followed your bet for a few weeks, you now decide that now is the time to cut your loss and close your bet.
To close any Spread Bet you simply make a bet in the opposite direction for the same stake. That cancels the bet. You therefore buy the short sterling future at 95.64 for £10 per tick. Your loss is £440, calculated as follows:
95.64 (purchase price) - 95.20 (selling price) = 44 ticks
44 x £10 (stake) = £440 (LOSS)
Example: Arthur Dent
| Acct Balance: |
£1,560 |
| Credit allocation: |
£0 |
| Required margin: |
£0 |
| Open P&L: |
£0 |
| Total |
£1,560 |
PLEASE NOTE - the example above shows a profit but you would make losses if the price moved in the opposite direction.
Get Started in Bonds and Interest rates trading!
If you would now like to get started have a look at some of the reviews on the spread betting companies page for Bonds.
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