THE BEECHMONT CREST ONLINE GUIDE TO STOCKS AND INVESTING
WHY BOND PRICES CHANGE
At first glance, the stability of bonds might make them seem boring. Well, here is a twist: the price of a bond can change over the course of its life.
When a bond is first issued, it sells at face value / par. But soon afterward, it moves up or down in price, as the bond is sold and resold in the secondary market. If a $1000 bond is selling in the secondary market for more than $1000, it is said to be selling at a premium. If the price of the bond moves below $1000, it is selling at a discount.
Bond prices change in response to interest rate fluctuations. Basically, bonds prices move in the opposite direction of interest rates:
-When interest rates rise, bond prices fall.
-When interest rates fall, bond prices rise.
Another important point to keep in mind is the relationship between a bond’s maturity date and volatility. The farther away the maturity date, the more volatile the price of the bond.
