The other main determinant of bond prices is the interest rates in the current economy. When interest rates rise, bond prices will fall. However, during times of declining interest rates, bond prices will rise. There is quite a logical reason for this change in prices when interest rates fluctuate. When the interest rates fall, many people turn to bonds as there is a greater rate of return. The more people who buy bonds, the greater the demand which leads eventually to higher prices, and for the investor, a large profit on the sale of previously purchased bonds. Interest rates rising, on the other hand, leads to a lesser demand for bonds and consequently the prices of previously purchased bonds decrease.
If you are able to hold onto your bond until the maturity date is reached, temporary changes in interest rates will not affect your financial investment; however, if you need to sell the bond before the marked maturity date, you might have to accept LESS than what you paid for it. This volatility can work to your advantage too, because it is possible that your bond could be worth more at the time you decide to sell. This is why it is important to keep up to date on bond prices. You may be able to make money by simply selling your bond before it’s maturity date.
In conclusion, I would suggest that bonds are a wise venue for anybody wanting to financially invest in different corporations or governments. I would caution, however that when selecting a bond, one should seek the guidance of an experienced investor. By choosing a bond that is right for you and your lifestyle, you have the potential of increasing your profits greatly and going home wealthier and happier.
Bibliography
Primary Sources:
Bench, Nachman. Questions and Answers About Today’s Securities Market. Englewood Cliffs,
N.J.: Prentice – Hall Inc., 1987.
From this source I learned about the bond-rating system. This book also defined what different types of bonds were, and some advantages of different bonds.
Darst, David M. The Complete Bond Book. Montreal: McGraw – Hill Book Company, 1975.
This book dealt with the major influences on the level and direction of interest rates. This book also deals with how interest is paid to bond holders.
- – -. The Handbook of the Bond and Money Markets. Montreal, Quebec: McGraw – Hill Book Company, 1981.
This book contains information concerning forces affecting the bond market. This book also helped in the analysis of price changes and rates of return.
Donoghue, William E. The Donoghue Strategies: 10 Minutes a Week to Investment Success. Toronto, Ontario: Bantam Books, 1989.
Different types of bonds were discussed in this book including the zero-coupon bond. This book dealt with both the upside and the downside to bonds as an investment.
Downes, John. Dictionary of Finance and Investment Terms. Toronto, Ontario: Barron’s, 1985.
The information attained from this book was simply definitions of the many terms used in the bond world.
Fridson, Martin S. Investment Illusions: a Savvy Wall Street Pro Explodes Popular Misconceptions About the Markets. Toronto, Ontario: John Wiley & Sons, Inc., 1993.
This book dealt with the different rating agencies and gave examples as to the discrepancies that can be found between the major rating agencies. This was quite helpful when trying to understand the rating system.
BONDS AND THE BOND MARKET
– Bonds are an agreement between two entities. One lends the other money at a set rate of interest. Throughout the life of most bonds, interest is paid to the bond holder. At the maturity date (when the interest payments cease), the investor’s original amount of money is given back to them.
– Bonds are among the most stable financial investments. If $1000 had been invested in 1950 into the average bond, it would now be worth over $17 000.
– Bonds can be sold before the date of maturity specified on the bond, sometimes for a gain, while a loss may be incurred at other times.
– Interest rates and the creditability of a company are the main factors in determining any changes in prices of bonds.
– There are many types of bonds available, some of these include: convertible bonds, zero-coupon bonds, Canada Savings Bonds, and foreign bonds.
- Convertible bonds can be exchanged for a predetermined number of common stocks in a company.
- Zero-coupon bonds pay all of the interest at the maturity date along with the principal amount.
- The price of Canada Savings Bonds are not volatile like other bonds.
- Foreign bonds pay in foreign currency, therefore the value of the bond issuer’s currency must also be taken into account when looking to invest in bonds.
- Municipal bonds are given out to help finance public works (i.e. street lights, fountains, etc.)
– There are many different agencies in the world who rate bonds. The main two agencies in North America are Moody’s Investment Services and Standard & Poor’s. As there are many different companies which rate the bonds, some bonds may receive a different rating from company to company.
– Bonds are rated on their stability, their ability to make interest and principal payments, and on the outlook of their future and are classified under one of the following ratings (as by Moody’s Investment Service): AAA, AA, A, BAA, BA , B, CAA, CA, or C.