What factors determine the price of a bond?

The price of a bond is primarily influenced by several key factors, which include interest rates, credit quality, time to maturity, and coupon rates.

Interest rates are perhaps the most significant factor, as there is an inverse relationship between bond prices and interest rates. When interest rates rise, the price of existing bonds typically falls because new bonds are issued at higher rates, making the older bonds with lower rates less attractive. Conversely, when interest rates fall, existing bonds become more valuable.

Credit quality refers to the issuer's ability to repay the debt. If a bond's credit quality is high, it is seen as a safer investment, which tends to lead to higher prices. Conversely, lower credit quality typically results in higher risk and, thus, lower prices.

Time to maturity also plays a vital role. Generally, bonds with longer maturities tend to have more volatile prices compared to those with shorter maturities. This sensitivity is due to the increased uncertainty of cash flow over a more extended period, which can be affected by interest rate changes.

Coupon rates, which are the interest payments made to bondholders, also significantly affect bond pricing. A bond with a higher coupon rate is generally more attractive because it offers a higher return compared to bonds with lower coupon rates