Par Munis — Sub-Par Performance
By Andy Kalotay and Guy Davidson, January 2021
The negative convexity of par munis poses a challenge for professional investors in managing interest rate risk. Near-par munis underperform relative to those selling at a high premium or at a deep discount due to tax considerations that result in extended duration and negative convexity. Using tax-neutral analytics, Andy Kalotay and Guy Davidson show that such aversion to par bonds is justified.
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