If a bond investor sells a three-year Commonwealth Treasury bond futures contract at 7 per cent and on delivery date the interest rate of Treasury bonds is higher than they expected at 8 per cent,they will have:
A) gained money on their long position.
B) lost money on their long position.
C) lost money on their short position.
D) gained money on their short position.

Question

Quizplus · Accepted Answer

When a bond investor sells a futures contract (taking a short position) and interest rates rise, the value of the bond decreases. Since they agreed to sell at a higher price (when rates were lower) and can now buy back or settle at a lower price (due to the rate increase), they profit from the difference.

If a Bond Investor Sells a Three-Year Commonwealth Treasury Bond