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I have been watching some near end of life REIT 10 year bonds. It looks as though bonds selling above par even with a make whole call provision don't sell as fast as those with a similar yield and term that are priced below or at par. Has anyone else noticed this or maybe this is just a one-off situation?
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Yes, I think you are correct. A bond selling at a premium over par can be called out from under you at a loss. Hence people tend to avoid them.

I have just been through this with my yield stocks list, mostly trust preferred stocks, ie bonds listed on major exchanges and traded as preferred stocks.

The bond market was traumatized during the meltdown last fall, and there was a flight to quality, especially to treasuries. Bond prices fell sharply. They have been recovering gradually. But I notice at this point that most of the A and higher bonds are close to par. Many lesser issues continue to have not only higher yield, but also potential for nice capital gains when they are called.

So it seems the discount is an additional incentive to take more risk in the current market. But gee, who buys junk bonds in mid recession? Hang on for dear life if you have them, but diversification sure is nice. I wouldn't load up on these things.
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"A bond selling at a premium over par can be called out from under you at a loss. Hence people tend to avoid them."

My point was that even those with a "make whole call provision". From what I understand you are protected from an early call with this.

http://financial-dictionary.thefreedictionary.com/make-whole...

make-whole call provision
A stipulation in a bond indenture that permits the borrower to redeem a bond prior to maturity by making a lump-sum payment equal to the present value of future interest payments that will not be paid because of the early call. The provision makes the bondholder whole by providing compensation for interest payments that are missed because of an early redemption.

I believe the the present value is calculated using a rate based upon the comparable term of a treasury note plus maybe a 1/4 or 1/2%. This would make it too expensive for the issuer to call early.

So what I sm saying is that the market is not pricing in this protection and you are able to earn a higher yield because of a psychological rather than real risk of loss due to call.
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I never gave it much thought, but maybe the market does have it priced correctly when considering taxes. If you're buying a boatload of bonds, and maturity is far enough out, and your in the high tax bracket, one might make out better by buying discounted bonds, reporting that last bit of income as a capital gain instead of interest.
Of course if one bought the bonds at a premium, one would have a capital loss. But I'm no tax attorney and I'm not in the high bracket, so I don't know how that would work out.
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