Broad Trends Influence Bond Prices

• One side up, the other downteeter-totter image by Rog999 from Fotolia.com
  
  Although high-quality bonds tend to be relatively stable, the market price of their shares does rise and fall. Price changes in bonds may reflect broad trends in interest rates. When rates rise across the board, the market price of bonds fall, even though individual bond issuers may remain strong. This occurs even if issuers are governments or big, “blue chip” corporations. When interest rates fall, the market price of most bonds rise. It’s like a teeter-totter.
  
  

Company-Specific Events Influence Bond Prices

• Too much debt cuts creditworthinessDebt concept - cutting a credit card image by Sophia Winters from Fotolia.com
  
  On an individual basis, the market price of bonds may rise or fall if there is a change in the perceived creditworthiness of the issuer. If a company’s sales decline or its debt burden mushrooms, the company may have difficulty meeting its interest payments. The market price of bonds the company issued months or even years ago may fall because investors are less interested in buying them. Demand governs market prices.
  
  

Principal Value vs. Market Value

• Principal value is (almost always) stablepiggy bank image by forca from Fotolia.com
  
  The principal value of bonds remains unchanged in all but extreme cases because their value at “maturity” is fixed. The principal value is the amount the issuer borrowed (excluding interest) when the bond was first issued. This is the amount due to bondholders when the debt matures. Unless the issuer is in severe financial difficulty, the bonds’ market value will gradually rise to match or sometimes even exceed the principal value as the maturity date draws nearer.
  
  

Risks and Bond Funds

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  In the investment world, risk is always relative. Stocks are more volatile in price than bonds and are regarded as higher risk investments, but some bonds are riskier than some stocks. During periods of crisis in the financial markets, even bonds issued by large, “too-big-to-fail” banks plunged and were regarded as high risk. As the markets began to improve, aggressive investors were eager to purchase the bonds at bargain prices in spite of the lingering risk.
  
  

Other Bond Funds

• Mutual funds aim to reduce risk.A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com
  
  Bond funds are classified by many factors, including the amount of time that must elapse for the bonds to reach maturity. There are short-, medium- and long-term bonds. Money market funds have an average maturity of less than 90 days and strive to maintain a stable value of $1 per share. Although they are regarded as safe, when the Federal Reserve Board tried to restore order to the financial markets in 2008 by bringing interest rates down, the yield on some money market funds reached zero.
  
  There are also funds that invest in international bonds, convertible bonds, municipal bonds, “zero coupon” bonds and a variety of others. Mutual fund managers use diversification--owning many different bonds--as well as various investment tools and professional research in an effort to select the best investments and keep yields up and risks down regardless of the market climate.