List the factors that influence price of bonds.

List the factors that influence price of bonds. 

Ans. Following factors determine the price of bonds: Price of bond depends mainly on three things: 

1. Coupon rate: Bonds prices and yields are inversely related. An increase in yield brings about a proportionately smaller change than a similar decrease by same amount. Bond prices are more sensitive to changes in yield when the bond is selling at a lower yield initially. 

2. Maturity period: Price of long-term bonds responses more to interest rates than short-term bonds. As maturity increases, interest rate increases at a decreasing rate. Prices of low coupon bonds reacts more to interest rate than high coupon bonds. 

3. Prevailing rate of interest: If prevailing rate of interest increases price of bonds decrease and vice versa.