The price of a bond is determined by a number of rather complex factors. One of the most important of them is the term, or maturity date, of the bond. Long-term bonds usually produce slightly higher yields for two reasons. First, the obvious difficulty of appraising the financial status of the issuing agency so far in the future must be considered at the time of purchase, and the buyer therefore feels entitled to some recompense in the form of a slightly higher yield.
Second, prevailing interest rates may and often do change considerably, so that a 32 percent bond will look even better if money becomes more plentiful and 3 percent bonds become generally accepted, but this may also work in reverse. A 32 percent yield may look very attractive at a time when money is quite plentiful and it is not necessary to issue bonds carrying high rates in order to attract investment capital, but it may lose its attractiveness when money has become scarce, so that many 42 percent bonds are available. The holder of the 32 percent bond is then faced with a problem. If he holds it to maturity, he will only get the rate of return specified, supposing that he bought the bond at par; should he decide to sell, in order to take advantage of the higher return on the later and now current bonds, he most assuredly must take a loss. This is because his bond now does not look so attractive to others since the newer bonds offer higher yields; the older issues will sell for less on the open market, because they are not so much in demand.
The fluctuation in the prevailing rate of interest is perhaps the most important item that influences bond prices. Even at the time of issue the price may be set above or below par because of the current trend in interest rates. In some cases, bond issues may actually be postponed because of this condition.
The liquidity of a bond, which means how quickly it may be converted into cash, is of great importance to all investors. With this in mind, it would be wise to invest only in those bonds which are available in goodly amounts, are frequently traded, commonly quoted, issued by nationally known agencies, and are generally well regarded. If a given bond can pass such a test, it will probably be in demand and thus may be readily salable should an occasion arise when quick conversion into cash is desired.
As a guide to the purchase of bonds, there are available what are known as "bond ratings." These are obtainable from such organizations as Moody and Standard & Poor; in order to obtain a reasonable appraisal of the merits of a certain bond, one need only refer to the rating assigned to it by these or some other reliable organization.
It is certainly advisable that the investor study these reports and consult with his broker before investing in bonds that might not have such a glowing reputation. As in all cases, it's best to be informed before handing your money to the smiling man in the fancy hat.