What You Should Know

There are some key external factors that influence the value of your bond investments, either by affecting the value of a particular bond that you hold; or in a larger context, by affecting the larger bond markets.

For example, the price of an individual bond is affected by the credit rating of the bond. Relative prices of bonds are influenced by perceptions of credit quality; and credit ratings agencies are influential in shaping such perceptions. Interest rates are another key influence on bond prices: just as bond prices go up when interest rates go down, the prices of bonds will generally drop as yields—interest rates—go up. Finally, in general, being a bond holder, i.e. to have given an issuer a loan, gives you priority rights to being repaid before shareholders, but individual investors should study bond issue prospectuses for corporate issues as they will give you the information about the rights of bond holders for a particular issue.

In addition to understanding the impact of key factors on the value of an individual bond, it is important to understand how bond market prices are directly linked to economic cycles and conditions and to concerns about inflation and interest rates, two key influences on bond prices.