A financial future offers the investor a convenient way to buy a debt security without having to pay for immediate delivery. Although there are structural differences between delayed delivery and outright purchase, the two become comparable when the investor buys a “front-end” bond that matures on the delivery date and uses the proceeds to fund delivery of the futures contract.

The difference in cash flow pattern between outright purchase and delayed delivery has two distinct causes—(1) the yield differential between the so-called front-end rate and the cash security and (2) the difference between the purchase price of the futures contract and the price of the cash security. In the world of futures, the latter is called the price basis. Because the former measures the net interest cost to carry a long position in the cash security, it is often called the carry spread.

That portion of the price basis needed to offset the accumulated costs associated with the carry spread is called the carry basis. The larger the residual component of the price basis, the better the value represented by the futures contract relative to the cash security. For this reason, the author calls this component the value basis.

The concept of carry and value bases can be applied to yield, as well as to price, spreads. The yield on a financial future is simply the conventional bond yield to maturity for a cash flow derived from the deliverable instrument priced at the contract price. The yield basis is defined as the difference between the yield on the futures contract and the yield on the cash security. At the break-even futures yield, the yield basis just offsets the carry basis—the accumulated costs of the carry spread.