GC1 News, expectations and bond prices

A 5% coupon bond and zero-coupon bonds maturing in years two to five trade over five periods. The last period opens only to settle.

Objective

Finish with as much wealth as possible. The session runs three times, and each trader's results add up.

What it shows

• News and expectations moving bond prices along the yield curve.
• A forecast of next year's rate that sharpens through each period.
• How the curve's shape, and not one price, answers to a rate forecast.

Watch out for

• A forecast that has not yet sharpened, acted on as if it had.
• Starting positions that differ, so two traders seldom want the same trade.
• Five periods, where the fifth only settles, so nothing opens late.

Who takes part

• Trader — every student. Trades CPN5, a 5% coupon bond, and the zero-coupon bonds Z2, Z3, Z4 and Z5.
• Each trader starts with a different long and short portfolio, from -200 to 200 of CPN5, Z2 and Z5.

Class size

Ten to forty students in one role. Starting portfolios differ, so the class needs enough traders for someone to be on each side.