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Unformatted text preview: AAA AA A BBB BB Junk bond B Junk bond Special Characteristics-Zero coupon bond o Phantom interest Why bonds?-Income!-May not be taxed at Fed and State level-Preserve principal-Usually pays higher interest than CDs plus higher yield due to state tax exemption-Reduces risk of owning stocks (diversification) So what is so complex?-After tax yields o Comparison of munis/corp Municipals 3.5 % Does not pay fed tax Corporate 5.3% Pays fed tax o 3.45%-Bond price fluctuations o Fixed Coupon rate never changes o Variable Interest rate of the market o Bond prices change inversely to MARKET interest rates-Bond yield fluctuations o Bond price changes alter yields-Yield to maturity o Factors: Price at maturity Coupon rate Number of years to maturity Current price of the bond...
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- Fall '10