Determinants of bond prices Acase study of Nairobi stock exchange

Abstract

Over time, the bond market has become increasingly important as an aid to foster economic growth in any country. This study therefore, concentrated on the factors that influence bond prices so as to encourage investment in this sector. The factors studied were both macroeconomic such as change in future interest rates and non-macroeconomic such as liquidity of the issuer. Lack of available information to investors so as to be able to have predictable bond prices has contributed to an inactive bond market in Kenya. The study therefore was intended to restore investor confidence by identifying the types of bonds traded on the Nairobi Stock Exchange (N SE), identifying the factors that influence bond prices on the NSE, and establishing the extent of the relationship between these factors and bond prices. Secondary data from the NSE and the Central bank of Kenya was used. State and Corporate bonds and their performance over a 5 year span were considered. The population of the study included listed bonds on the NSE. A data collection schedule was used for data collection while regression analysis and time series were used in the data analysis. Macroeconomic variables were found to significantly influence the bond price. To promote the bond market, governments should formulate policies that pursue a low interest rate regime, ensure that inflation is controlled and that the exchange rate is stable. The non-macroeconomic variables such as liquidity and profitability did not significantly influence the bond price, however their importance in promoting investor confidence cannot be underscored.