1. Interest rates
In general, when interest rates rise, bond prices fall. When interest rates fall, bond prices rise.
Example – You own a bond paying 3% interest. When interest rates are low – say 1% – your interest rate is higher than the going rate. This makes your bond attractive to other investors. But if interest rates rise to 5%, your bond is less attractive.
In general, when inflation is on the rise, bond prices fall. When inflation is decreasing, bond prices rise. That’s because rising inflation erodes the purchasing power of what you’ll earn on your investment. In other words, when your bond matures, the return you’ve earned on your investment will be worth less in today’s dollars.
3. Credit ratings
Credit rating agencies assign credit ratings to bond issuers and to specific bonds. A credit rating can provide information about an issuer’s ability to make interest payments and repay the principal on a bond. In general, the higher the credit rating, the more likely an issuer is to meet its payment obligations – at least in the opinion of the rating agency. If the issuer’s credit rating goes up, the price of its bonds will rise. If the rating goes down, it will drive their bond prices lower. Learn more about credit ratings.