Individual Bonds - Hold to Maturity or Sell While They’re Hot?

October, 2010

During 2008 and 2009, the confidence in the bond market collapsed as a result of the rising default rates associated with the sub-prime mortgage crisis.  Investors fled from corporate and municipal bonds into “risk-free” US government securities.   As a result, corporate and municipal bond prices dropped and yields increased dramatically relative to U.S. Treasuries. This turned out to be a great opportunity for yield-seeking income investors who purchased these high coupon bonds.  When the credit markets subsequently calmed down in 2010, yields reversed course and are now near historic lows.  The prices of the bonds issued with high coupon rates in 2008-09 have been bid up to historic highs.  With the economy at a point where interest rates may increase, bond holders are concerned that bond prices may decline somewhat.  This begs the question:  Should I hold my bonds until maturity or sell them now while the prices are high to achieve maximum total return?”  Find out how to analyze your bonds in this paper.

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