Bonds in Default
Chapters in this video
- 0:00 When a municipal bond flatlines: default defined
- 0:50 The accrued interest trap: why defaulted bonds trade flat
- 2:20 Normal bond vs. defaulted bond comparison table
- 3:10 Recovery value explained: scrapyard pricing after the crash
- 3:57 Sam's first trap: no exceptions for promised catch-up payments
- 4:25 Income bonds and zero-coupon bonds: the other flat traders
- 5:12 Sam's second trap: income bonds are corporate, not municipal
- 5:47 Rapid-fire exam recap
What this video covers
- Why a defaulted municipal bond stops accruing interest immediately, with no exceptions for promised future payments or restructuring plans
- What trading flat means in settlement: the buyer pays zero accrued interest to the seller
- How recovery value pricing differs from normal bond pricing, and why the price reflects only estimated bankruptcy recovery
- Why income bonds (also called adjustment bonds) trade flat, and the critical exam distinction that they are corporate securities, not municipal securities
- Why zero-coupon bonds trade flat by definition, since no coupon payments exist to accrue
- How to spot the three-way comparison the exam sets between normal bonds, defaulted bonds, and the two other flat-trading bond types
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