Question

What current factors would impact bond prices and risk to the buyer and/or seller? Use examples from current business news.

Answer 1

Following are the factors that impact bond prices and risk to the buyer and/or seller:

• Interest Rate: When the interest rate rises, bond prices fall. When interest rates fall, bond prices rise. This is a risk if you need to sell a bond before its maturity date and interest rates are up.
• Inflation: When inflation is on the rise, bond prices fall. When inflation is decreasing, bond prices rise. That's because rising inflation erodes the purchasing power of what you'll earn on your investment.
• Credit Rating: are agencies assign a credit rating to bond issuers and to specific bonds. A credit rating can provide information about an issuer's ability to make interest payments and repay the principal on a bond. In general, the higher the credit rating, the more likely an issuer is to meet its payment obligations at least in the opinion of the rating agency. If the issuer's credit rating goes up, the price of its bonds will rise. If the rating goes down, it will drive their bond prices lower.
• Market risk: is that the entire bond market declines. If this happens, the price of your bond investments will likely fall regardless of the quality or type of bonds you hold. If you need to sell a bond before its maturity date you may end up selling it for less than you paid for it.