While a bond’s end return is fixed, the market conditions surrounding its sale can cause fluctuations in its price to buy. High interest rates, for example, tend to make bonds less attractive to investors by providing other means of attaining high returns with low risk. For this reason, interest rates and bond prices tend to have an inverse relationship.

As well as buying bonds during favorable periods, traders can use financial derivatives to speculate on a bond’s market price.

Bonds have a clear advantage over other securities and bonds are generally viewed as safer investments than stocks. In addition, bonds do suffer from less day-to-day volatility than stocks, and the interest payments of bonds are sometimes higher than the general level of dividend payments.

The disadvantages of bonds include rising interest rates, market volatility and credit risk. Bond prices rise when rates fall and fall when rates rise. Bond portfolio could suffer market price losses in a rising rate environment.

Investors trade bonds for a number of reasons, with the key two reasons being - profit and protection. Investors can profit by trading bonds to pick up yield (trading up to a higher-yielding bond) or benefit from a credit upgrade (bond price increases following an upgrade).