Buying Bonds

[doodle]

I have a question at buying bonds that yield below current market rates and thus sell at a discount to face value.

For example,  if I buy a bond that yields 3.875% at a discount to its 100 dollar face value vs. a bond that has say a 4.5% yield at its face value, will these bonds perform differently in any way?

The 3.875% bond yields seems to make smaller interest payments on a specific amount of money and I will get reimbursed more when the bond matures at full face value....kind of like a capital gain.

Is there anything I need to be aware of here?

[MediumTex]

Not really.

The lower yielding bond will be slightly more volatile (assuming the same duration), but it's not worth worrying about.

I would buy the lowest yielding bond that otherwise meets the requirements for the LT bond holdings.

[escafandro]

For example I have the 08/15/40 3.875% bond and the 05/15/41 4.375% bond. Today the last bond up a little more with less quantity invested. So I would probably buy the bond with longer duration and highest yield.
Anyway, changes in general are quite similar and proportional.

[melveyr]

An easy way to grasp the extra volatility is by realizing that the principal payment that is paid back at the end has more periods to be discounted to todays present value. At the extreme end of the spectrum is a zero coupon bond. The lower yielding bond is kind of like moving in the zero coupon bond direction.

One thing I am not sure about though: Does the lower yielding bond offer a greater tax advantage? I know that this advantage is extinguished with the zero-coupon bond due to tax laws, but does the advantage still hold with a lower yielding bond?