I was wondering if anybody knew the mechanics of how bond futures payout interest? Is the interest a function of the premium in the bond futures relative to the cash bond?
Yes, the "interest" is built into the discount of the future versus cash. As time passes and a future approaches expiration, its price will rise. Buying a futures contract is like borrowing at the short end of the yield curve and investing at the long end. If you don't use any leverage by putting T-bills equal to the underlying value of the bond future into your account, then you have a synthetic bond position.