Bonds in Default
Chapters in this video
- 0:00 What "default" means for a municipal bond
- 1:15 Trading flat: buyer pays zero accrued interest
- 2:17 Recovery value and what the price really reflects
- 2:42 Normal bond vs defaulted bond side-by-side
- 3:06 Zero-coupon and income bond impostors
- 4:00 Income bonds are corporate, not municipal
- 4:22 Rapid-fire exam recap
What this video covers
- What it means for a municipal bond to be in default, and why coupon payments stop accumulating the moment default hits
- What "trades flat" means in practice: the buyer pays zero accrued interest to the seller
- Why the price of a defaulted bond reflects only recovery value, not market value plus accrued interest
- The side-by-side distinction between a normal bond and a defaulted bond on accrual, buyer payment, and price composition
- Why zero-coupon bonds trade flat (there are no coupon payments to accrue in the first place)
- Why income bonds (also called adjustment bonds) trade flat, and the trap of confusing them with municipals when they are actually corporate instruments
- The three bond types that should instantly come to mind when you see "trading flat" on the exam: defaulted, zero-coupon, and income
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