How do bonds work on the secondary market?
Although bonds are commonly bought from the issuing company and held until maturity, they can also be traded on the secondary market.
The price of a bond is typically affected by general interest rates – with the price and interest rates working in opposite directions. So when interest rates go up, the price of the bond goes down. This inverse relationship is driven by investors looking for the best return.
It’s important to understand this concept when trading bonds on the secondary market. If you buy a bond when interest rates are low and then sell when interest rates are high, it’s likely investors are going to be more interested in buying new bonds than your bonds as they will receive a higher return (due to higher interest rates). Subsequently to sell the existing bond, the bond price has to be reduced to make the 'yield to maturity' (return) more attractive.
Interested in online share trading? Find out more at ASB Securities.
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