Why Bonds Fluctuate in Price

Many are the factors that influence directly price fluctuations of bonds. These factors include the relation among prices of bonds, coupon rates, market yields, maturities and risk assessment.

The following axioms illustrate this relation:

  • The coupon rate relative to market rates of interest. When the rate of interest boosts in the market, and surpass the coupon rate of a bond, the price of such bond will fall so as to resemble the current yield at the market’s interest rate. When the rates of interest drop, prices of bonds go up. While lesser the coupon rate of a bond, greater will price fluctuations be.
  • The length of time to maturity. While greater the maturity, more volatile will price fluctuations be.
  • For a given change in a bond’s yield. A longer time to maturity of the bond greater will the magnitude of changes in a bond’s yield be.
  • For a given change in a bond’s yield. The size of the shifts in prices of bonds increase at a decreasing rate depending on the time to maturity of the bond.
  • For a given change in the bond’s yield. The magnitude of the prices of bonds are inversely related to the bond’s yield.
  • For a given change in the bond’s yield. The magnitude of the price increase caused by a decrease in yield is greater than the price decrease caused by an increase in yield.
  • Changes in risk assessment by the market. While lower the quality of a bond, lower is the price. While higher the quality of the bond higher the price. The greater the risk of the bond, the more volatile will be the bond’s price fluctuations.