the future market for U.S. Treasury bonds and notes

the future market for U.S. Treasury bonds and notes is one of the most active markets for the forward delivery of an asset to be found anywhere in the world. Treasury bonds and notes are a popular investment medium for individuals and financial institutions because of their safety and liquidity. Nevertheless, there is substantial market risk involved with longer-term Treasury bonds and notes due to their lengthy maturities and relatively thin market. For example, Treasury bonds, which have original maturities stretching beyond 10 years, totaled only about $85 billion at year-end 1980, less than 10 percent of the total public debt of the United States and much less than half the volume of Treasury bills outstanding. Because the market for Treasury bonds is thinner than for bills, their price is more volatile, creating greater uncertainty for investors. Not surprisingly, then, Treasury bonds were among the first financial instruments for which a future market developed to hedge against the risk of price fluctuations.
Only those Treasury bonds which either have maturities of at least 15 years or cannot be called for at least 15 to 20 years from their date of delivery (depending on the exchange selected) are eligible for futures contracts. Moreover, all Treasury bonds delivered under futures contracts. Moreover, all Treasury bonds delivered under a futures contract must come from the same issue. The basic trading unit is $100,000(measured at par) with a coupon rate of 8 percent. Bonds with coupon rates above or below 8 percent are delivered at a premium or discount from their par values. Delivery of Treasury bonds is accomplished by look entry, and accrued interest is prorated. Price quotes in the market are expressed as a percentage of par values. The minimum price change which is recorded on published lists or in dealer quotations is one thirty-second of a point, or $31.25 per futures contract.
Contracts for U.S. Treasury notes and non-callable bonds with maturities of four to six years also are traded today. Like Treasury bond contracts, T-note contracts are priced as a percentage of their par (or face) value, based on an 8 percent coupon rate. The basic trading unit is $100,000 face value. Trading in Treasury note futures began at the Chicago Board of trade in June 1979, while Treasury bond contracts were first traded in August 1977