Wednesday, February 6, 2013

Investors are learning the duration risk of zero coupons

According to the WSJ, investors are turning away from muni bonds that pay no coupons. In an upward yield curve, these typically carry much higher yields than their coupon cousins. Their accruing interest is also tax-exempt like the actual coupon interest on a bullet bond. However, now that the prospect of higher interest rates is on the horizon, investors are recalling their college investment courses in which they (should have?) learned that the duration of a zero is equal to the maturity while the duration of a coupon is much much lower.

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