Many factors come into play in determining the price of a bond. John O’Connor, senior wealth advisor at The O’Connor Group, talked to Financial Pipeline co-editor Romina Maurino about how interest rates, economic conditions and the health of a corporation affects bond prices.
JOC: A bond, to most retail investors, the average investors they would look and say, “okay, this bond will pay me five per cent and it will come due in five years,” but it’s a lot more complicated than that. Bond prices will actually change in value as perceptions of interest rates adjust. Also, bond prices are different than reporting a GIC. A GIC gets reported, the amount of principal that’s invested, how much you get at maturity, and what your interest rate is. In a portfolio, bonds, individual segregated bonds, the price is adjusted each and every day, and the price of that particular bond is reacting to many different things in the economic environment, one of them being the perceived risk of interest rates going up that causes the bond price to go down. The underlying valuation of the corporation that issued that bond or IOU could change depending on economic conditions and whether or not it’s liquid, what kind of supply are around. So there’s many, many complicated factors that go into pricing a bond, and this the average investor doesn’t understand. Having spent 20 years in the market myself, I appreciate the fact of how difficult it can be to understand.