Final answer:
Municipal bonds are likely to be refunded when issuers can secure lower interest rates. Bond values fluctuate with interest rate changes; thus, one might pay more for a bond if current interest rates have dropped. Corporate bonds yield more than Treasury bonds but come with higher risk.
Step-by-step explanation:
Understanding Municipal Bonds and Market Dynamics
Municipal bonds that are most likely to be refunded are those for which the issuer can secure lower interest rates due to changes in the market. The decision to refund typically occurs when issuers can replace older bonds with new ones at these lower rates, reducing their debt service costs. Refunding happens in a similar fashion to refinancing a mortgage for a lower interest rate.
Regarding the value of a bond given a change in interest rates, if rates drop, new bonds pay less interest and as a consequence, existing bonds with higher rates become more valuable. Consequently, one would expect to pay more than $10,000 for a bond that was issued with a higher interest rate if now the prevailing rates are lower. Conversely, if interest rates rise, new bonds would pay more, making older bonds less attractive, and their prices would likely fall below their original value.Corporate bonds generally offer higher yields compared to Treasury bonds because they carry higher risk. Investors are compensated for this risk through higher interest rates. Evaluating whether the return on corporate bonds is worth the risk involves analyzing the creditworthiness of the issuer and market conditions influencing interest rates and bond prices. Credit rating agencies like Moody's provide an assessment of the risk associated with corporate bonds, where an AAA rating signifies high safety.