7 Market Factors Affecting Corporate Bond Prices
1. Current Interest Rates- Corporate bond prices are affected by the current interest rates. If the interest rates go up then the price of the bond will fall, and if the interest rates drop then the price of the bond will increase. The current interest rate depends on the economic situation as well as other factors.
2. The Credit Rating of The Company- The credit rating of the company offering the bond will affect the corporate bond rates. A company that has a top AAA rating will have a higher price than a company with a BBB rating. Junk bonds, which are rated BB and lower, are usually priced less than bonds that have a higher credit rating and are classified as investment grade. The company’s credit rating will affect the price of the bond being offered.
3. The Level of Liquidity Offered- Liquidity is one of the market factors that will affect corporate bond prices. Bonds that are not highly liquid may not have many buyers on the market if you decide to sell, while bonds that are extremely liquid can be sold in a very short time. The level of liquidity is considered before the bond price is set. Corporate bond quotes identify the credit rating of the business but these quotes do not indicate just how liquid the bond is on the primary and secondary markets.
4. The Yield and Returns Offered- One of the first things that investors look at when they
buy corporate bonds is the yield and return offered by the investment. Both of these factors are evaluated before the bond price is set by the company or by the market when the bond is traded on the secondary market.
5. Pricing That Is Not Transparent- Transparency is important with corporate bond prices, and bonds that do not have transparent pricing may be over or under priced. When the market adjusts for this mistaken value then the bond price may be affected.
6. The Risk of Political Unrest- Investing in corporate bonds involves the risk of political unrest, and this is especially true if you choose foreign companies for your bond purchases. Foreign countries have different political climates, and any activity or political news that affects the companies in a country can affect the price of the bonds offered by the companies. Events including the Arab Spring and coups in foreign countries caused fluctuations in the bond prices for those areas.
7. Economic and Currency Risks- Corporate bond prices are impacted by the economic risks of the country where the company is located. If the economy has a downward trend then the bond prices may increase. This is because investors tend to turn to debt securities for investing when the economy is slow, making these instruments see higher demand at these times. Currency risks also play a role in the price of a bond purchased from a foreign company, because currency fluctuations can change the value of the bond in a short time.