Question

Discuss the factors that cause the price of a bond to change.

Answer 1

The main factors which affect bond prices are as follows:-

(1)Interest rate:-Interest rate is inversely proportional to bond price .When interest rate or yield is high then bond prices fall.

(2)Credit Rating:-If credit rating of bond is high then interest rate will be low as there are less chances of default and therefore compensation for risk is less and hence interest rate low .In that case bond price will be high.

(3)Coupon rate:-If coupon on bond is high then bond price will be high because coupon is directly proportional to bond price.

(4)Inflation:-when inflation rise then bond price will fall because when inflation is high then interest rate will be higher because investor will require compensation for inflation also