Understanding how bond prices can rise or fall continued 3. How an issuer’s prospects 4. How supply and demand affectbonds affectsbonds Some companies find it financially easier than others If a lot of companies or governments suddenly need to to pay their debts. This ability to repay is measured borrow, there will be many bonds for investors to choose by their credit rating, or creditworthiness. It is an from, so prices are likely to fall. On the other hand, if assessment, carried out by independent rating agencies, more investors want to buy than there are bonds on offer, of a borrower’s ability to repay its debt. A higher rating prices are likely to rise. means a company is very likely to meet its payments. What drives the value of bonds up On the other hand, if a company’s financial situation or down? weakens, its credit rating will be downgraded, as there is a greater chance that the company will struggle to make VALUE INCREASES: More investors want to buy, but its payments. As a result, its bond price will often fall, fewer bondholders want to sell. as investors decide that the income offered by the bond isn’t enough to make up for the fact that it is now riskier. VALUE DECREASES: More bondholders want to sell, but The same is true for governments, which are also given fewer investors want to buy. credit ratings by rating agencies. Governments in the developed world, such as the UK or the US, are generally Bonds can be traded like shares considered to be more likely to meet their payments than governments in some developing countries, and so This means their prices can go up or down, tend to be given a higher credit rating than the latter. A depending on a number of factors change in a government’s financial health will therefore These factors include interest rates, inflation and affect its credit rating and, in turn, the price of its bonds. the economic outlook 6