Fixed Income Characteristics

What this video covers

• How U.S. Treasury, corporate, and municipal bond tax treatments differ at the federal and state levels, and why municipal bonds are the least liquid major bond type
• How to compute taxable equivalent yield (TEY) to compare tax-exempt municipal yields to taxable bond yields, and why higher tax brackets magnify the muni advantage
• Phantom income from zero-coupon bonds and original issue discount (OID): annual ordinary income tax with zero cash received, making them poor for taxable accounts but ideal for tax-deferred accounts
• The full liquidation preference hierarchy from secured creditors through common stockholders, and the memory aid: debt before equity, secured before unsecured
• Why callable bonds benefit the issuer (not the investor), create negative convexity, and require yield-to-call (YTC) instead of yield-to-maturity (YTM) when trading at a premium
• Why zero-coupon bonds have zero reinvestment risk but maximum interest rate risk, since duration equals time to maturity with no early coupon payments
• Modified duration versus effective duration: when each applies, and why callable or puttable bonds demand effective duration due to embedded option risk