Can anyone please explain how Bonds work?

Question

i have some experience in tradings in shares, but absolutely no experience with bonds. I know the basic principle. a company issues bonds to attract funds, in return for making funds available investors get an periodic interest payment over the duration, and their funds back.

Could anyone please explain:

how the value value of the bond is determined and why and how the value fluctuates? Since bonds tend to have a fixed interest rate, and therefore a fixed value and return on investment.

what is the difference between different types of bonds. (convertable, fluctuating, floating rates etc.) and which bonds would go well with which investment goals (long term, short term, low risk, high risk etc)

what is a-pari?

with shares, you try to buy low and sell high. whats the essential goal you try to attain when trading in bonds?

Answer 1

The value of the bond at issue is determined by its issuance price (usually, but not always $1000). Once the bond enters the open market it trades based on its interest rate. If interest rates fall once a bond is issued, the old bond will have a higher purchase price on the market (effectively lowering its yield to be in line with current bond yields) and vice-versa. If you buy the bond at issue and hold it to maturity it will have a fixed yield, however if you buy it on the secondary market it may not have the same yield as when it was originally issued because you may pay more than market value for it (due to lowering of interest rates) or less for market value for it.

A convertible bond can be converted to shares of the company as specified in the prospectus of the bond. This is far more frequently used with convertible preferred shares, but it can be done with bonds. The terms of the conversion can affect the price of the bond. For example if the bond is convertible at any to 1 share of the underlying security then the bond's price should be around the same price as 1 share of the underlying security plus a premium for the interest paid on the bond.

A floating bond is a bond whose interest rate is not fixed but is tied to some other rate plus or minus a risk premium.

Generally, people buy bonds in order to receive the interest payments as income, so they tend to hold the bond to maturity (that is, the date when the principal amount is returned by the bond issuer). However, there are strategies that involve trading bonds around the yield curve or the federal funds futures rates as well.

Answer 2

bond is valued based on interest rates. If interest rate goes up, bond price goes down.

the purpose of buying bonds is to get the coupon and capital gain if the interest rate goes down.