What Factors Influence Corporate Bond Prices?


Quick Answer

The factors that influence corporate bond prices include interest rate risk and credit risk. Purchasing power risk of fixed-interest securities such as corporate bonds affects their yield, reports The Securities Industry and Financial Markets Association.

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Full Answer

An organization’s credit quality along and its potential to fulfill its financial obligations determine the safety of an investor’s principal. Firms with high credit ratings and with a proven record of meeting their obligations have a lower credit risk that those with lower ratings, which have to compensate investors by offering their securities at a higher yield, according to The Securities Industry and Financial Markets Association. An investor’s real rate of return is a factor of the actual rate of return minus inflation. Consequently, the purchasing power of investment income reduces when inflation rises. In turn, falling demand of corporate bonds pushes their prices downward.

A slump in interest rates fuels a rise in prices of corporate bonds because outstanding fixed-rate securities have a higher rate and value. Conversely, high interest rates reduce the market price of existing securities due to increasing demand for new-issue securities. Lower interest also causes reinvestment risk, which forces investors to reinvest their earnings at a lower rate, explains The Securities Industry and Financial Markets Association.

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