How Is the Price of a Specific Bond Determined?
The price of a bond will go down if a company is in financial need, but it will go up if the company is in great financial shape. Learn about changing interest rates and the price of bonds with help from a portfolio manager in this free video on personal finance and money management.
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Okay. So how is the price of a bond determined? It's a very good question. Most bonds -- you know, 90 percent -- out there, you're going to see bonds at par, which is 1,000 dollars for one bond. And if a bond goes down in price, it may mean that the company is either in more financial need, maybe has some issues, maybe the bond is seen as a little riskier, so the price will come down. If the price goes up, it may mean that the company is in great financial shape and that this is a great investment. The other thing that can happen is interests rates are changing all the time. If I were to issue a bond today at par -- at 1,000 dollars per bond -- for seven percent, and tomorrow, interest rates drop, my seven percent bond is going to look very attractive, so people are going to be willing to pay a little bit more than 1,000 dollars. They might give me 1,010 dollars for that same bond because, now, it's become very valuable. Conversely, if interest rates were to go up and my seven percent bond no longer looks very good, what will happen is that the value of my bond will be decreased. So it might...I might only get 900 dollars for my seven percent bond. And that's a very basic way of looking at it. So the two things to look for are the credit worthiness of the company because that's what's you're doing -- you're buying their debt. And the other thing to look at is: Are interest rates changing? Have they gone up or down, and where do you see them going because that will give you an idea of the value of that...of that particular bond.