Question

How do I respond to this. -->When determining the market price of a bond that is trade-able there are a few things to consider.The amounts, currency and timing of the interest payments and capital repayment due, the quality of the bond, and available redemption yield of other comparable bonds which can be traded in the markets.

Answer 1

This can be broken down to various points to determine how each of these factors affect the price of a bond. Let’s look at each from a risk perspective to understand the argument better.

Currency: As the yields go up, it tends to be a positive sign for the home currency. For Example: when the yields go up, it is reflected in the dollar bullishness. The sole reason being when your interest rates are rising, there is a fight of capital into your home nation, which strengthens the value of it.

Timing of interest payment – the price of the bond (Clean price + accrued interest) is the same as its clean price after coupons are paid. The price increases incrementally as the bond moves towards its next coupon.

Capital repayment due: It signifies the credit risk in the bond. The more prudent capital and coupon repayment, the lower the credit risk and lower chances of default. Most of the time, rating downgrades are followed with a fall in the bond value.

Quality of the bond: The quality of the bond refers to the probability that the bond issued will pay the principal and interest when due. Better the quality, lower the price fluctuations.

Available redemption yield or YTM: This is important because when the interest rates are falling, the bonds need to be reinvested at a lower yield, which lowers your potential long term returns.