TRADING CASE GC1
Trading bonds with economic news
LEARNING OBJECTIVE
Learn how interest-rate expectations and economic news affect bond prices across a five-year market.
KEY CONCEPTS
Time value of money | Discounting | Interest-rate expectations | News
HOW THE CASE WORKS
Each trial has five periods. You may trade five bonds in Periods 1-4; Period 5 is used only to value and settle positions. News during each trading period helps predict the following year's interest rate.
BOND PAYMENTS
| Bond | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| 5% coupon bond | 5 | 5 | 5 | 5 | 105 |
| Year-2 zero | 0 | 100 | 0 | 0 | 0 |
| Year-3 zero | 0 | 0 | 100 | 0 | 0 |
| Year-4 zero | 0 | 0 | 0 | 100 | 0 |
| Year-5 zero | 0 | 0 | 0 | 0 | 100 |
INTEREST RATES
The Year 1 rate is 2%. In Years 2-5, rates can range from 1% to 5%; without news, each year's expected rate is 3%. Rates are related across years, so a strong or weak economy can continue into later years.
TRADING RULES
- You may borrow, lend, and sell any bond short.
- Use limit orders to make a market or market orders to trade at displayed prices.
- Click a security name to view news; newer headlines are more reliable.
- Several consistent headlines are more useful than one noisy forecast.
AFTER TRADING CLOSES
The realized annual rate is applied to closing cash.
Coupons and face values due that year are paid.
Period 5 settles all remaining cash flows; no trading takes place.
PERFORMANCE: Grade cash per trial = 0.0001 x final cash, subject to large upper and lower limits. Results accumulate across trials and determine your market rank.