Yield Burning

Welcome to another informative entry in our trading glossary. Today, we will shed light on the term: Yield Burning. As with everything in the field of trading, understanding every term and its implication can pave the way for a successful trading experience.

Examining Yield Burning

Yield Burning refers to an illicit practice in the bond market. But what exactly does it entail? Primarily, it involves financial institutions selling municipal bonds above their fair market value. The higher price reduces the yield on the bonds. Hence, the term "Yield Burning".

Why would the sellers do that, you might ask? This leads us to the core impact of Yield Burning.

The Impact of Yield Burning on Municipal Bonds

Generally, the purpose of Yield Burning is to reduce the amount of tax-free interest that the issuer has to pay to the bondholders. By selling the bonds at inflated prices, the yield (or interest rate) of the bond drops. Therefore, the issuer pays less in interest while boosting their profit margin, hence "burning" the yield.

However, it is essential to note that Yield Burning is not only considered unethical but also illegal. If caught, involved parties can face hefty fines and penalties.

Understanding the Consequences

Being aware of Yield Burning means that you can make better-informed decisions in your trading journey. Even though Yield Burning can temporarily advantage some parties, the overall damage to the financial eco-system and the penalty for the act makes it a high-risk, low reward strategy.

Furthermore, Yield Burning can have negative impacts on the investor. The lower yield means a reduced return on investment. Hence, as an investor, it's crucial to stay informed and wary of such practices.

Hopefully, this overview of Yield Burning has been insightful. Remember, a smart trader is an informed one. Stay tuned for more useful entries in our glossary of trading terms.