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Investment Analysis Clubs / Macro Economic Trends and Risks
|Subject: Re: Municipal bonds: A train wreck waiting to ha||Date: 12/7/2012 7:22 PM|
|Author: warrl||Number: 410773 of 514498|
METROPOLITAN WASH D C ARPTS AUTH ARPT SYS REV AIRPORT SYS REV BDS
Callable at 10/1/20 @ 100
Currently Valued at 113.9
I would not attempt to judge whether this bond will be called in 2020 or not. If it is called, the fund will obviously lose the extra 19 years of a 5% yielding bond.
Oh, that's easy.
This is a $100 bond (and not a zero-coupon bond which is more complex to evaluate) being traded at $113.90. That $13.90 is ENTIRELY due to the 5% coupon rate being above currently prevailing interest rates. (In fact you might be looking at a $16 interest-rate premium combined with a $2.10 discount for some other reason.)
So as of 10/1/2020, you will see one of two results:
1) Currently-prevailing interest rates will have risen, erasing that $13.90 premium and possibly putting a discount in its place
2) The bond will be called, erasing that $13.90 premium price.
Callable bonds are very easy to predict. Just figure out what you (as a bond-holder) hope the issuer will do with the call option. That's what they WON'T do. Guaranteed.
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