A bond is an official financial document sold by governments or firms which promises that the money borrowed from the public will be paid back with certain interest. When an investor buys a bond, he receives particular interest rate in return during the term of the bond. Economic trends are one of the key drivers of the performance of the bond market. For instance, when the economy is strong, the demand for money in the country increases, and governments sharpen their focus towards raising enough money to finance more projects. This high demand in turn increases the interest rates. As a result, interest rates influence the prices of bonds (Choudhry, 2010). Therefore, bond market performance is highly responsive to the changes in the economic trends.
However, credit rating depends on certain characteristics of the bond such as maturity date, the issuer , as well as the par value and the risks of the bond. For instance, a bond that matures in one year is much more predictable and less risky than a bond that matures in more than one year. Therefore, the bond with longer maturity period has higher interest rate. In addition, a long-term bond will oscillate more than a short-term bond (Fabozzi, 2007).
For instance, companies with low credit risk have higher credit rating and their bonds are regarded as risk-free. As a result, their bond prices are higher as well as their market performance. In addition, most governments have established bond rating systems to help investors determine a company’s credit risks as well as credit rating in order for investors to make informed investment decisions (Bailey, 2005). Therefore, it is essential to avail all relevant information and characteristics of the bonds in the market to investors in order to enable them to invest wisely.