The bond market is affected by prevailing economic conditions such as growth rates and inflation. In contrast to stocks, the investor knows in advance the percentage of his profits when investing in bonds. The investor determines the appropriate amount to purchase the bonds according to economic conditions. If he expected that the inflation rate would be high, he would not be willing to buy a large amount, and vice versa.
In the bond market, there is an inverse relationship between the price of the bond and the interest rate. If the price of the bond increases, the interest rate will decrease, and if the price falls, the interest rate will rise.
The matter may seem inconsequential, and to clarify the matter we will rely on the following example:
A non-interest bond (a bond issued at interest equal to 0%, but at a price less than its nominal value) with a face value of $ 1,000 and a maturity date of one year is priced at $ 950, at the moment the return on this bond is equivalent to 5.26% ((1000-950 (/ 950 = 5.26%).
There is no doubt that any investor will be happy to obtain an interest rate equivalent to 5.26%, but in reality, this depends on what happens in the bond market.
Investors in the bond market, like other investors, are looking to exploit opportunities at the lowest price. If interest rates rise and new bonds are issued at an interest rate of 10%, no one will want to buy a bond with an interest rate of 5.26%, while a bond can be obtained at an interest rate of 10%. In order for the holder of the first bond to find a buyer, he must sell it at a price that will be equal to the return of this bond, the return from buying the bond with an interest rate of 10%, in which case, for the first bond to be equivalent to the bond with an interest rate of 10%, its price must drop from $ 950 (which It gives a return equal to 5.26%) to $ 909 for a return equal to 10%.
Bond prices rise in periods of uncertainty in the markets and when economic crises occur and periods of slow economic growth, investors buy bonds as a kind of safe haven, because investing in bonds is less risky than investing in stocks or futures contracts. It is also known that there is an inverse relationship between the stock and bond markets. Often, when stock prices rise, bond prices fall, and vice versa