Q&A: How does a bond work?

Q. What factors affect the performance of bonds? A. The price or yield of a bond is determined by supply and demand in the market. As the price rises, the bond gets more expensive and the yield falls, and vice versa. There are two main factors that affect the performance of bonds. Take the Tesco bond, for example. The yield on the bond can be split into two components and each will fluctuate with the market. The first component is the government rate, often referred to as the risk-free rate. The second component is the credit spread. This is the additional yield that an investor re...