high-coupon bond

Treasury officials reached yesterday said the question of redeeming high-coupon bonds was under consideration.

The net asset value shrinks when funds buy high-priced, high-coupon bonds to increase their payouts.

Buying high-coupon bonds that are sure to see their value drop is a way of maximizing current income, and for some investors it is appropriate.

Much of the volume came about because low interest rates enabled state and local governments to redeem old high-coupon bonds with lower-coupon, lower-cost, ones.

Some bonds fell by 12 points, with zero coupon bonds and high-coupon bonds trading at large premiums over parity hit the hardest.

Another problem is that the YTM yield curve does not distinguish between the different payment patterns of low-coupon bonds and high-coupon bonds with the same maturity.

Coupon as measured by current yield Since high-coupon bonds trade at a discount relative to low-coupon bonds, we would expect the coefficient on current yield to be negative.

"The big moves in rates are behind us" he said, "and good performance now will depend on technical analysis, things like credit analysis and reading indentures to select high-coupon bonds not likely to be refunded."

A typical set of coupon yield curves is shown in Fig. 5.4, which shows that high-coupon bonds trade at a discount (have higher yields) relative to low-coupon bonds, because of reinvestment risk and for tax reasons.

With a low-coupon bond, the present value will be dominated by the terminal payment and the annuity curve will lie close to the spot curve; with a high-coupon bond, the two curves will be further apart.

They need to be especially wary of a common bond-fund gambit of inflating current yield - at the expense of total return - by paying premium prices for high-coupon bonds that are likely to be paid off early or will certainly depreciate back to face value as they approach maturity.