'longer-term/lower-coupon bonds' vs 'shorter-term/higher …

Mar 30, 2015 · But if the coupon was only 2%, your RoI got halved; With short term bonds, interest rates matter less because you can always hold a bond to maturity, and the return of the principal makes up a much greater part of the value of the bond than the coupon.

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'longer-term/lower-coupon Bonds' Vs 'shorter-term/higher …

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Does It Matter Whether I Buy Low-coupon Or High-coupon …

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Each year the owner will pay tax on the coupon plus the accretion of principal value. More tax will be paid on the 4% coupon bond. ($5.84 versus $5.52 per $100 of face value with a 24% tax …

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FAQs about 'longer-term/lower-coupon bonds' vs 'shorter-term/higher … Coupon?

Why are long term bonds better than short-term bonds?

Long-term bonds are riskier than short-term bonds because they have a greater duration, exposing them to a higher probability that interest rates will change over their remaining duration. This is unlike short-term bonds, which are closer to maturity and have fewer coupon payments remaining. ...

How does the price of long-term bonds change with interest rates?

Long term bonds see a greater change to their price—rising when rates fall and falling when rates rise. This is explained by their greater duration measure. ...

What happens if a bond has a 2% coupon rate?

If market interest rates rise, then the price of the bond with the 2% coupon rate will fall more than that of a bond with a higher coupon rate, such as 4%. This is because investors would prefer the higher-yielding bonds, making the lower-coupon bond less attractive and thus reducing its price. ...

What happens if a bond has 20 coupon payments left?

If a bond has 20 coupon payments left, it will be underpaying the investor for a longer period. This difference in remaining payments will cause a greater drop in a long-term bond's price than it will in a short-term bond's price when interest rates rise. ...

How does the size of a coupon affect bond duration?

When a coupon is added to the bond, the larger the coupon, the shorter the duration number becomes. The bond's duration number will always be less than the maturity date. ...

Is it better to buy or sell long-term bonds?

Investors who buy long-term bonds may face a deeply discounted market price if they attempt to sell them before maturity, due to changes in interest rates. This risk is less significant with short-term bonds. ...