Municipal Bond Forum
Call dates of long-term bonds
Q
I recently had a stockbroker buy a few hundred thousand dollars of munis with a duration of 20 to 30 years, shortly after I saw the bond market fall and the value lost was $25,000 if these munis were sold today! A few quick questions: 1) How often are bonds of 20 to 30 years called before maturing? 2) If interest rates go up, then bond values will go down? 3) If the stock market crashed tomorrow, would the value of these muni bonds increase immediately?
A
James A. Klotz responds:
Without knowing the specific bonds to which you refer, we are unable to comment on your market value. If you would like to forward cusip numbers and the quantity of each issue, we would be pleased to supply you with the current market prices of your holdings.
Over the past 20 years, the majority of long-term bonds have been called on or after their call dates because interest rates have been steadily declining over this period. When issuers have the ability to borrow at a lower rate than they are paying on existing debt, they are motivated to retire the outstanding bonds.
You are correct: When interest rates rise, bond prices decline.
Your thoughts on the stock market are based on an assumption that stocks are crashing due to a major economic upheaval. This might create what is called a “flight to quality.” In times of peril, investors tend to look to the bond market for safety and stability.
Start here.
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