Companies will often choose to issue bonds, a form of debt obligation, as a means of raising funds. These bonds are purchased by investors, who can collect payments on the bond through its life until it reaches maturity, at which point it can be redeemed for its face value. A bond's price does not go up as it matures -- although its value can increase slightly if interest rates change.
When a person holds a bond, then the price of the bond will actually decrease incrementally as it gets older. This is because the bond issuer will make regularly scheduled payments on the bond. So, as the bond gets older, fewer of these payments will remain. This means that the bond will be worth less, as the holder can expect to receive less money in the future than before.
When a bond fully matures, the holder is allowed to redeem it for a set amount of money. While the price will consistently decline as more payments are made, if the bond issuer does not default, then the market will be more confident that these payments will continue to be made on time. This can raise the credit rating of the bond and raise its price slightly, as this makes it a more solid investment.
The price of a bond will likely change as it matures depending on changes in the rate of interest. When the interest rate rises, the price of a bond may decline, as the holder of the bond will receive less of a return on his investment than if he were to invest in a newer bond issue with comparable risk. However, if the interest rate declines, the price of the bond may go up, as the bond is worth more relative to newer bond issues.
In addition, a holder of a bond should consider the effect of inflation on the bond's value. Most currencies experience at least mild inflation over time. This means that, regardless of the bond's actual price, the bond may decline somewhat in value as the currency in which it is denominated becomes less valuable. In some cases, the rate of inflation may even outstrip the interest rate, making bonds unprofitable investments.
- "Economics"; Roger A. Arnold; 2009
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