Municipal Bond Forum
On Lessons in Laddering
Q
I read your article on laddering and the example you gave, which stated that if the $100 bond (paying 6%, or $6/100) value dropped to $50, then you could sell the bond for $50 and buy a similar bond paying 6% for $50. However, would this not yield 6% of the $50, or $3 per 100, and so the income would be halved?
A
James A. Klotz responds:
In an interest rate environment in which a 6.00% bond is worth approximately 50.00, all comparable quality 6.00% bonds will be worth approximately 50.00.
In the scenario I described, the new bonds purchased would yield more than 12.50%. They are being purchased at a 50% discount to 100.00. Both bonds would be producing the same income.
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