Coupon Rate

As a rule of thumb, the higher the coupon rate the lower the price volatility of the bond in response to a given change in interest rates. High coupon bonds generate greater cash flows with each coupon payment, thereby providing greater ability for reinvestment if rates increase. In addition, this characteristic provides an opportunity for capital gain if rates decrease.

Floating rate issues provide price protection in periods of rising interest rates since such an issue will adjust by paying the higher interest rate(usually based on a premium over LIBOR). However, the risk associated with such an issue relates to the possibility that interest rates may fall. In such a situation, there is no opportunity for capital gains and there will be lower income flowing from the investment. Indeed, the variability in future income flows is itself a risk with respect to a person's future needs and expectations of the investment.

  Term to Maturity

Bonds with long terms to maturity tend to exhibit significant price volatility in response to a change in interest rates. A bond's present value (market place) is obtained by discounting its cash flows over the life of the product. Instruments with longer terms to maturity have present values which vary further out in time. Consequently, the variable present value of the cash flows lends price volatility to a long term bond.

If an issue has a redemption, extension, or retraction maturity feature an investor should determine at whose option a maturity might be lengthened or shortened. The pricing of such issues is usually based on the assumption that the feature will be exercised and therefore the term to maturity is adjusted to reflect the particular feature.

  Market Price

Bonds selling at a premium are usually less volatile in price than discount bonds in response to a given change in interest rates. This is consistent with the explanation of coupon rates (above), since premium bonds are bonds that have higher coupon rates relative to discount bonds.

Since a premium bond has a higher coupon, it is more costly for the issuer to service than a discount bond with a lower coupon. If an issue has a call feature, it is more likely that a premium bond will be called than a discount bond, due to these servicing costs. Once the bond is called, the issuer can then reissue debt (if necessary) at the lower prevailing market rates.

  Quality (Credit Rating)

An issuer with a solid credit rating has a low risk of default. Accordingly, instruments backed by such an issuer have a lower yield, as part of the risk-reward tradeoff. In practice, an investor is rewarded for the higher risk associated with a lower rated bond by purchasing it at a price that provides a higher yield to maturity. An unanticipated rating change can cause a significant reaction in an issue's price.

  Security Against Assets of Issuer

Generally speaking, the higher and more liquid the degree of the security behind the issue, the better its price should perform under circumstances of credit uncertainty. For instance, bonds which are secured against specific assets are better positioned than debentures that are not secured other than by the reputation of the issuer.

  Sinking Fund

A sinking fund feature is often advantageous to the investor for several reasons. The feature provides buying support for the issue if it trades well below the sinking fund call price. In addition, it forces the issuer to reduce the total issue outstanding so the issuer is less likely to default. However,the feature may also appear unattractive because the investor may have his/her bonds called to satisfy sinking fund requirements when the bonds are trading above the sinking fund call price. Consequently, capital gains are limited and the investor must accept the reinvestment risk associated with the possible call and the uncertainty with respect to the anticipated future cash flows.

  Yield to Maturity

Instruments with longer terms to maturity usually have a higher yield, except during periods when there is an inverted yield curve. Yield calculations on issues with special features are calculated specifically on the feature rather than to maturity. For example, the yield on a callable bond is calculated to the call date rather than to maturity.

  Liquidity of Issue

Small size issues and issues which are concentrated among a small group of public investors may be difficult to buy or sell due to infrequent trading in the market. Widely-known issuers whose debt is approved as legal investments by certain groups of institutions have an enhanced marketability. This is simply a result of increased information available. Market pricing for liquid products is available through frequent market trading, and credit analysis is straightforward due to the availability of public information.

  Specificatios of Issue

Such factors as the required denomination of purchases, required minimum purchase, and settlement terms may impair the ease of transferability and thus,the value of an issue.

  Special Features of Issue

Convertible Debentures
Convertible debentures provide the investor an opportunity for indirect participation in the capital appreciation of the issuer's common stock. Included in the pricing of the convertible debenture is a minimum boundary of conversion value (or the number of shares per bond upon conversion multiplied by the share's current stock market price). These characteristics increase the marketability of the issue; hence, a lower coupon rate is appropriate.

Foreign Bonds
Bonds denominated in foreign currencies have an added risk of currency depreciation vis-à-vis the investors domestic currency. The added risk requires compensation in the form of a higher yield (lower price).

  Physical Certificates

All new issues are book-based only with no physical certificates. This book-based system was developed to eliminate the difficulties involved in getting the physical certificates to the owner, especially as the securities are continually traded. This means that the investor does not get a physical certificate of their bond, coupon, etc. Instead all holdings are shown on the client's accounts and if the product comes in certificate form, they may request a physical certificate. However, there is a cost involved in obtaining a physical certificate for a security.

  The Effect of Change In Price On Yield

Due to the short-term nature of money market instruments, a few cents increase in price can have a dramatic effect on yield. Consider the following example:

A 90-day Government of Canada Treasury Bill has a yield of 5.85%. This converts to a transfer price of $98.578. Suppose the price moved up by just $.10 make the price $98.678. The yield you would get would then become 5.43% that's a decrease in yield of 42 bps. Unlike stock investing the concept of yield is much more important than minor price fluctuations when investing in Bonds.