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Frequently Asked Questions
Municipal Bonds

These are questions from real investors phoned in to my past TV show, live. I’ve included them here in the same phrasing used by callers, which is not always the “correct” phrasing(!) But I thought that many other investors who are not bond professionals may be able to relate to the callers’ way of talking.

Some of my answers are quite long and informative. Others are short, to the point, “zesty zingers!” Sorry. No one ever accused me of being too tactful!

Question:
Here are a number of questions related to Municipal Bond Insurance. Let me list the questions first, and then I will give one comprehensive answer that will cover them all.

  • What is the difference between an insured Muni Bond and an A+ Muni Bond?
  • On an insured bond, does the insurance pay principal for the entire duration of the bond or for only a short time?
  • Is it worth paying a premium for bond insurance?

Answer:
There are several different municipal bond insurance agencies. They insure municipal bonds as to timely payment of principal and interest, which enhances the creditworthiness of the bond. Most municipal bond rating insurers are rated either AA or AAA. A bond can be rated AAA for any number of reasons, one of which is that it is insured by a AAA-rated municipal bond insurer.

The fact that a bond is insured and rated AAA does not guarantee that it is of the highest creditworthiness. AAA-rated bonds backed in U.S. Treasuries are deemed to be the “highest” credit quality. Of all the varieties of AAA-rated munis, in my opinion, AAA-rated insured bonds are the lowest of the safe categories. At this time, please see my article under Investment Strategies called “How Did That Bond Become AAA Rated; You Ought to Ask.” I often ask people if they would rather buy a bond of a community that is rated AAA on its own or a bond of a community that for all intents and purposes is bankrupt but carries a AAA rating because it has municipal bond insurance? Obviously, these are two extremes, but it illustrates the point. I would not buy a bond simply because it was insured. For my money, the underlying rating on the bond would have to be A-rated or better to make me feel comfortable that the AAA rating from the Muni insurance made it a very creditworthy bond.

The obligation of the municipal bond insurer is simply that they pay principal and interest on the bond as per the bond indenture agreement. They are not obliged to call the bond early. They are not obliged to pay out the investor upon default. They are not obliged to pay any premium. Look at four different AAA-rated bonds: (1) A general obligation bond from a community that is rated AAA on its own, (2) A bond that is rated AAA because it is backed by a great stream of revenues, (3) A bond that is backed by U.S. Treasuries, and (4) A bond that is insured by a AAA-rated insurer. All other features being equal, the insured bond actually yields the most of these four types. That is because it is viewed as being the riskiest of these four types. Let me say, they are not risky bonds! It’s just when compared to other types of AAA bonds, they are the riskiest.

Is it worth paying a premium for bond insurance? I think it is, if it helps you be more comfortable with your purchase. It is an added piece of security, and since the yield is still higher than other AAA-rated bonds, you can feel that you didn’t pay too dearly for it!

Question:
I bought a $25,000 Muni Bond. It is an essential general obligation AAA bond. It was not insured. Was it bad to buy an uninsured bond even if it was AAA rated?

Answer:
This individual has confused some bond market vocabulary. Principally, the terms general obligation and essential service mean very different things! A general obligation (GO) bond is a municipal bond whose debt obligation can be paid by raising taxes of the citizens of that municipality. An essential service bond is a revenue bond, and the debt obligation of this type of bond is paid by the revenues earned from citizens paying their electric and water and gas and other utility bills. So, they are two very different types of bonds: GOs and Revenues.

In the olden days, GOs were viewed as safer, because it was thought that if you were able to raise taxes to pay off the debt, what could be safer? However, what good is a general obligation bond if it’s the general obligation of a community that’s bankrupt, or near bankrupt, or whose citizenry can’t afford any increase in taxes? Today, we have a municipal bond market that is so vast that we have general obligation bonds that are extremely safe and extremely risky, and we have revenue bonds that are extremely safe and extremely risky, and everything in between. Neither category is safer than the other, because both categories carry all varieties of creditworthiness among their bonds.

Question:
Are there any good original Munis out there now?

Answer:
At any given moment, there are about 10,000 municipal bonds available, and depending on your own risk characteristics and portfolio needs, you can find a variety of bonds available for you. There is no one municipal bond that is good for everyone, that everyone must own.

Question:
What is your opinion of High Yield Muni bonds?

Answer:
Why bother? I like to use a municipal bond portfolio as our “more conservatively” invested money. Having said that, there are a few categories of municipal bonds which I might buy that might be considered high yield: Crossover municipal bonds and Story Bonds.

Crossover municipal bonds are those municipal bonds which are backed by corporations whose rating is split between investment grade and non-investment grade. That is to say, bonds that are rated BB by one agency and rated BBB by the other rating agency. These are called Crossover bonds, and they have attractive yields but carry higher risks as well. If they are issued by corporations whose corporate bonds we would not hesitate to buy, then their municipal bonds should be equally acceptable.

Story bonds are municipal bonds that have been issued without the issuer purchasing a rating opinion on them. They are called “non-rated.” If a non-rated bond is from an issuer whose business you know and are comfortable with, or are from a region of the country, municipality, or city that you know and are comfortable with and understand the revenue streams or tax base, then you should feel comfortable buying the Story bond. Even though it’s not rated, you should be confident that you “know the story.” Story bonds frequently carry higher yields to reward you for the non-rating. Be very careful. In the 1980s, many nursing home bonds were issued that were non-rated, and many of them defaulted. It’s very important that you know “the story” behind a non-rated bond and feel absolutely comfortable with the creditworthiness of that story.

Question:
Is there any way, other than Munis, to get tax-free income?

Answer:
There are only one or two corporate issues that I am aware of that, because of certain taxation legalities, are tax-exempt. Otherwise, there are no other ways besides municipal bonds, to get tax-free income. There are plenty of vehicles that offer tax-deferred income, but these are not comparable because, in the end, you’ve got to pay up those taxes, whereas with munis, you do not.

Certain municipal bonds may be subject to state and alternative minimum taxes, and capital gains tax may apply for bonds sold prior to maturity.

Question:
How do you get a list of new municipal bonds being offered?

Answer:
The Blue List was a newspaper published daily on blue newsprint paper that listed all the bonds that were available for purchase by all the houses in the country that subscribe to the Blue List (which is a lot!). The Blue List is only available now on the Internet, and it is not widely used by its previous subscribers.

Question:
How are municipal bonds affected by the interest rates? When they go up and down, do they move the same as Treasuries?

Answer:
Yes. They generally move the same way as Treasuries, but probably in different magnitudes depending on tax issues and upon the part of the yield curve that is being discussed: short, medium, and long-term. However, if there were significant changes in the income tax laws of the United States, that would change the behavior of the municipal bond market and rates might not move with Treasuries.

Question:
Here are three questions on Puerto Rican bonds. Let me ask them together and answer them at once:

  1. Puerto Rican Bonds. What is your opinion and can you get them for about 12 years maturity?
  2. Do you prefer Puerto Rican Bonds or Muni Bonds?
  3. Name some triple-net Munis.

Answer:
Puerto Rican bonds are municipal bonds issued by municipalities of Puerto Rico. Puerto Rican bonds and those of Guam, U.S. Virgin Islands, and American Samoa issue bonds that are triple tax-exempt in the United States. Triple Tax-Exempt means that United States citizens do not have to pay Federal, state, or local income taxes on the interest from these bonds. Certain issues may be subject to alternative minimum taxes, and capital gains tax may apply if sold prior to maturity. Of the group, Puerto Rican bonds are by far the most common in the U.S. market.

Puerto Rican bonds come in every way, shape, and form, from non-rated to Treasury-backed. They come as short as 30 days and as long as 30 years and everything in between. There is no one maturity of Puerto Rican bonds that is better than another. Consider the maturity that best fits your bond portfolio ladder.

The only other bonds that I know of that are triple exempt are to New York residents. Residents of New York, so long as they buy bonds issued by any New York municipality, do not have to pay Federal, state, or local taxes on the interest from those bonds.

There are other States which offer bonds that are double tax-exempt, which means you do not have to pay Federal or State income tax on the interest. For instance, Minnesota, Michigan, Oregon, and California are very high State Tax states. If you are a resident of these states and you buy bonds issued in these states, you will not have to pay Federal or State taxes on the interest from those bonds.

Practically every State has one or two issues within their own state that they allow to be double tax-exempt for their own State residents. It’s not really a relevant question unless you are in one of the high State income tax states.

Question:
What do you mean by a “kicker bond”?

Answer:
A Kicker Bond is also referred to as a Cushion Bond. These are long-term (20-year, 30-year) municipal bonds that have high coupons (at least one percentage point higher than the going rate for comparable bonds) and which have calls in ten years or less. Because of the high coupon, you will pay a premium for these bonds.

The Kick-up or the Cushion comes in because there is a chance that these bonds will go to 20-year or 30-year maturity and not be called, though not a very good chance that they won’t be called. Of course, the chance of not being called may be quite low for bonds. Because of this chance that they won’t be called, they have to have a yield to maturity that is comparable to other similar long-term bonds. The price that this bond trades at in order to have a competitive long-term yield results in a great pickup in the yield to call if the bond is called.

For instance, a 10-year bond may have a yield to maturity of 5%. A 30-year bond may have a yield to maturity of 6%. A 30-year bond may also have a call in ten years and, being priced to the 30-year maturity makes the yield to call in ten years something like 5.5%. That’s quite a pick-up (or kick-up) in yield over the comparable ten-year Muni at 5%. So, a kicker bond or a cushion bond gives us an added yield to call over the comparable term yield to maturity bond in the year of the call.

The risk is that the bond is not called, in which case you are left holding a high coupon, long-term bond. Remember that once a bond has reached its initial call date, it is callable anytime thereafter for the remaining life of the bond, not just at maturity. Another feature of a kicker bond is that because of its high coupon, municipalities will frequently pre-refund or escrow these bonds in U.S. Treasury securities in an amount equal to their principal and interest, in order to get them off of their balance sheet.

When a long-term bond becomes pre-refunded, it becomes a bond certain to be called in a shorter period of time, i.e., the call date to which it has been pre-refunded. That causes a kick-up in value, because it is for sure, now, a shorter-term bond. Also, because it has become backed in U.S. Treasury securities, its value has increased, because it’s viewed as highest quality. So kicker bonds or cushion bonds are frequently pre-refunded and thereby present us with an attractive total return (high interest plus capital gains) potential over non-kicker bonds.

Question:
Where are the best bargains in the Muni market?

Answer:
Well, I don’t like the way this question is phrased. I would rather ask, “Are there sectors of the Muni market that are higher yielding than others, yet rated very high?” The answer is Yes. I would certainly have a look at Housing Bonds in the municipal market. These can be tricky, so work with someone experienced. Single-family housing bonds are called more frequently than multi-family housing bonds. Housing bonds can be subject to speed pools in which they have very short lives. Housing bonds can be backed in U.S.-backed securities that make them very creditworthy. They can also be backed with some very old Section 8 Government Housing conditions that make them much riskier. It’s important to know the difference. You may read one of the articles in my Investment Strategies on Housing Bonds. This is a segment of the municipal market that can often be lucrative, but it requires some specialized Muni knowledge.

Question:
We have tax-free municipal bonds. Not sure what to do with them. Your opinion?

Answer:
If your tax bracket is 25% or higher, you generally should be investing in municipal bonds. If your tax bracket is below 25%, you generally should be investing in taxable bonds. It’s simple arithmetic. If you’re in the 25% tax bracket and you buy taxable bonds, there’s every possibility that the amount of interest that you get to keep after paying taxes will be LESS than the amount you get to keep from the interest earned from municipal bonds. Do a taxable equivalent yield calculation on any municipal bond (it’s easy to do) if you are questioning whether or not the Muni is still the best deal.

Question:
Do you like Munis for a couple 65 years old, and do you like them 10 to 12 years out?

Answer:
See the answer above. If your tax bracket is 25% or higher, go with Munis. If it’s below 25%, go with taxables. You need to build a laddered structure of bonds, whether they be Munis or any other kind, and it doesn’t make a difference if you’re 65, 25, or 105! You still need a ladder.

Question:
I have $100,000 in United States savings bonds. I’ve had them for five years. Should I cash them in and buy Munis or not?

Answer:
Do the arithmetic. Savings bonds are tax-deferred, not tax-free. Interest on Municipal Bonds is Federal tax free. What is your tax bracket? What are the rates of interest you can earn on each? Once you’ve listed all of the numbers and calculated them out, the math will tell you which one is better. See Taxable Equivalent and Tax-Free Equivalent Yields Calculated the Old Fashioned Way (2 separate articles) in Alister’s Investment Notes.

If your portfolio is greater than $500,000, Sharon Alister can provide a free analytic review to help ensure that your portfolio is in line with your investment goals. Call Sharon Alister at (800) 745-7110 or email info@AlisterTalksBonds.com

 

Interest Rates (Indications only)

Please note the rates for Ins’d and Pre-Res are not available from Bloomberg and will be updated as soon as possible.

Treasuries AAA Munis
3mo 1.815 N/A
6mo 2.009 N/A
1yr 2.237 1.74
2yr 2.482 1.87
5yr 2.809 2.19
10yr 2.970 2.53
30yr 3.145 3.14
today's rates chart

AAA Rated Munis

Pre-Res Ins’d Pure*
2 yr 1.91 2.05 1.87
5 yr 2.23 2.49 2.19
10 yr N/A 2.89 2.53
15 yr N/A 3.20 2.82
30 yr N/A 3.50 3.14

*Rated AAA on its own
Source: Bloomberg

Frequently Asked Questions
Municipal Bonds

These are questions from real investors phoned in to my past TV show, live. I’ve included them here in the same phrasing used by callers, which is not always the “correct” phrasing(!) But I thought that many other investors who are not bond professionals may be able to relate to the callers’ way of talking.

Some of my answers are quite long and informative. Others are short, to the point, “zesty zingers!” Sorry. No one ever accused me of being too tactful!

Question:
Here are a number of questions related to Municipal Bond Insurance. Let me list the questions first, and then I will give one comprehensive answer that will cover them all.

  • What is the difference between an insured Muni Bond and an A+ Muni Bond?
  • On an insured bond, does the insurance pay principal for the entire duration of the bond or for only a short time?
  • Is it worth paying a premium for bond insurance?

Answer:
There are several different municipal bond insurance agencies. They insure municipal bonds as to timely payment of principal and interest, which enhances the creditworthiness of the bond. Most municipal bond rating insurers are rated either AA or AAA. A bond can be rated AAA for any number of reasons, one of which is that it is insured by a AAA-rated municipal bond insurer.

The fact that a bond is insured and rated AAA does not guarantee that it is of the highest creditworthiness. AAA-rated bonds backed in U.S. Treasuries are deemed to be the “highest” credit quality. Of all the varieties of AAA-rated munis, in my opinion, AAA-rated insured bonds are the lowest of the safe categories. At this time, please see my article under Investment Strategies called “How Did That Bond Become AAA Rated; You Ought to Ask.” I often ask people if they would rather buy a bond of a community that is rated AAA on its own or a bond of a community that for all intents and purposes is bankrupt but carries a AAA rating because it has municipal bond insurance? Obviously, these are two extremes, but it illustrates the point. I would not buy a bond simply because it was insured. For my money, the underlying rating on the bond would have to be A-rated or better to make me feel comfortable that the AAA rating from the Muni insurance made it a very creditworthy bond.

The obligation of the municipal bond insurer is simply that they pay principal and interest on the bond as per the bond indenture agreement. They are not obliged to call the bond early. They are not obliged to pay out the investor upon default. They are not obliged to pay any premium. Look at four different AAA-rated bonds: (1) A general obligation bond from a community that is rated AAA on its own, (2) A bond that is rated AAA because it is backed by a great stream of revenues, (3) A bond that is backed by U.S. Treasuries, and (4) A bond that is insured by a AAA-rated insurer. All other features being equal, the insured bond actually yields the most of these four types. That is because it is viewed as being the riskiest of these four types. Let me say, they are not risky bonds! It’s just when compared to other types of AAA bonds, they are the riskiest.

Is it worth paying a premium for bond insurance? I think it is, if it helps you be more comfortable with your purchase. It is an added piece of security, and since the yield is still higher than other AAA-rated bonds, you can feel that you didn’t pay too dearly for it!

Question:
I bought a $25,000 Muni Bond. It is an essential general obligation AAA bond. It was not insured. Was it bad to buy an uninsured bond even if it was AAA rated?

Answer:
This individual has confused some bond market vocabulary. Principally, the terms general obligation and essential service mean very different things! A general obligation (GO) bond is a municipal bond whose debt obligation can be paid by raising taxes of the citizens of that municipality. An essential service bond is a revenue bond, and the debt obligation of this type of bond is paid by the revenues earned from citizens paying their electric and water and gas and other utility bills. So, they are two very different types of bonds: GOs and Revenues.

In the olden days, GOs were viewed as safer, because it was thought that if you were able to raise taxes to pay off the debt, what could be safer? However, what good is a general obligation bond if it’s the general obligation of a community that’s bankrupt, or near bankrupt, or whose citizenry can’t afford any increase in taxes? Today, we have a municipal bond market that is so vast that we have general obligation bonds that are extremely safe and extremely risky, and we have revenue bonds that are extremely safe and extremely risky, and everything in between. Neither category is safer than the other, because both categories carry all varieties of creditworthiness among their bonds.

Question:
Are there any good original Munis out there now?

Answer:
At any given moment, there are about 10,000 municipal bonds available, and depending on your own risk characteristics and portfolio needs, you can find a variety of bonds available for you. There is no one municipal bond that is good for everyone, that everyone must own.

Question:
What is your opinion of High Yield Muni bonds?

Answer:
Why bother? I like to use a municipal bond portfolio as our “more conservatively” invested money. Having said that, there are a few categories of municipal bonds which I might buy that might be considered high yield: Crossover municipal bonds and Story Bonds.

Crossover municipal bonds are those municipal bonds which are backed by corporations whose rating is split between investment grade and non-investment grade. That is to say, bonds that are rated BB by one agency and rated BBB by the other rating agency. These are called Crossover bonds, and they have attractive yields but carry higher risks as well. If they are issued by corporations whose corporate bonds we would not hesitate to buy, then their municipal bonds should be equally acceptable.

Story bonds are municipal bonds that have been issued without the issuer purchasing a rating opinion on them. They are called “non-rated.” If a non-rated bond is from an issuer whose business you know and are comfortable with, or are from a region of the country, municipality, or city that you know and are comfortable with and understand the revenue streams or tax base, then you should feel comfortable buying the Story bond. Even though it’s not rated, you should be confident that you “know the story.” Story bonds frequently carry higher yields to reward you for the non-rating. Be very careful. In the 1980s, many nursing home bonds were issued that were non-rated, and many of them defaulted. It’s very important that you know “the story” behind a non-rated bond and feel absolutely comfortable with the creditworthiness of that story.

Question:
Is there any way, other than Munis, to get tax-free income?

Answer:
There are only one or two corporate issues that I am aware of that, because of certain taxation legalities, are tax-exempt. Otherwise, there are no other ways besides municipal bonds, to get tax-free income. There are plenty of vehicles that offer tax-deferred income, but these are not comparable because, in the end, you’ve got to pay up those taxes, whereas with munis, you do not.

Certain municipal bonds may be subject to state and alternative minimum taxes, and capital gains tax may apply for bonds sold prior to maturity.

Question:
How do you get a list of new municipal bonds being offered?

Answer:
The Blue List was a newspaper published daily on blue newsprint paper that listed all the bonds that were available for purchase by all the houses in the country that subscribe to the Blue List (which is a lot!). The Blue List is only available now on the Internet, and it is not widely used by its previous subscribers.

Question:
How are municipal bonds affected by the interest rates? When they go up and down, do they move the same as Treasuries?

Answer:
Yes. They generally move the same way as Treasuries, but probably in different magnitudes depending on tax issues and upon the part of the yield curve that is being discussed: short, medium, and long-term. However, if there were significant changes in the income tax laws of the United States, that would change the behavior of the municipal bond market and rates might not move with Treasuries.

Question:
Here are three questions on Puerto Rican bonds. Let me ask them together and answer them at once:

  1. Puerto Rican Bonds. What is your opinion and can you get them for about 12 years maturity?
  2. Do you prefer Puerto Rican Bonds or Muni Bonds?
  3. Name some triple-net Munis.

Answer:
Puerto Rican bonds are municipal bonds issued by municipalities of Puerto Rico. Puerto Rican bonds and those of Guam, U.S. Virgin Islands, and American Samoa issue bonds that are triple tax-exempt in the United States. Triple Tax-Exempt means that United States citizens do not have to pay Federal, state, or local income taxes on the interest from these bonds. Certain issues may be subject to alternative minimum taxes, and capital gains tax may apply if sold prior to maturity. Of the group, Puerto Rican bonds are by far the most common in the U.S. market.

Puerto Rican bonds come in every way, shape, and form, from non-rated to Treasury-backed. They come as short as 30 days and as long as 30 years and everything in between. There is no one maturity of Puerto Rican bonds that is better than another. Consider the maturity that best fits your bond portfolio ladder.

The only other bonds that I know of that are triple exempt are to New York residents. Residents of New York, so long as they buy bonds issued by any New York municipality, do not have to pay Federal, state, or local taxes on the interest from those bonds.

There are other States which offer bonds that are double tax-exempt, which means you do not have to pay Federal or State income tax on the interest. For instance, Minnesota, Michigan, Oregon, and California are very high State Tax states. If you are a resident of these states and you buy bonds issued in these states, you will not have to pay Federal or State taxes on the interest from those bonds.

Practically every State has one or two issues within their own state that they allow to be double tax-exempt for their own State residents. It’s not really a relevant question unless you are in one of the high State income tax states.

Question:
What do you mean by a “kicker bond”?

Answer:
A Kicker Bond is also referred to as a Cushion Bond. These are long-term (20-year, 30-year) municipal bonds that have high coupons (at least one percentage point higher than the going rate for comparable bonds) and which have calls in ten years or less. Because of the high coupon, you will pay a premium for these bonds.

The Kick-up or the Cushion comes in because there is a chance that these bonds will go to 20-year or 30-year maturity and not be called, though not a very good chance that they won’t be called. Of course, the chance of not being called may be quite low for bonds. Because of this chance that they won’t be called, they have to have a yield to maturity that is comparable to other similar long-term bonds. The price that this bond trades at in order to have a competitive long-term yield results in a great pickup in the yield to call if the bond is called.

For instance, a 10-year bond may have a yield to maturity of 5%. A 30-year bond may have a yield to maturity of 6%. A 30-year bond may also have a call in ten years and, being priced to the 30-year maturity makes the yield to call in ten years something like 5.5%. That’s quite a pick-up (or kick-up) in yield over the comparable ten-year Muni at 5%. So, a kicker bond or a cushion bond gives us an added yield to call over the comparable term yield to maturity bond in the year of the call.

The risk is that the bond is not called, in which case you are left holding a high coupon, long-term bond. Remember that once a bond has reached its initial call date, it is callable anytime thereafter for the remaining life of the bond, not just at maturity. Another feature of a kicker bond is that because of its high coupon, municipalities will frequently pre-refund or escrow these bonds in U.S. Treasury securities in an amount equal to their principal and interest, in order to get them off of their balance sheet.

When a long-term bond becomes pre-refunded, it becomes a bond certain to be called in a shorter period of time, i.e., the call date to which it has been pre-refunded. That causes a kick-up in value, because it is for sure, now, a shorter-term bond. Also, because it has become backed in U.S. Treasury securities, its value has increased, because it’s viewed as highest quality. So kicker bonds or cushion bonds are frequently pre-refunded and thereby present us with an attractive total return (high interest plus capital gains) potential over non-kicker bonds.

Question:
Where are the best bargains in the Muni market?

Answer:
Well, I don’t like the way this question is phrased. I would rather ask, “Are there sectors of the Muni market that are higher yielding than others, yet rated very high?” The answer is Yes. I would certainly have a look at Housing Bonds in the municipal market. These can be tricky, so work with someone experienced. Single-family housing bonds are called more frequently than multi-family housing bonds. Housing bonds can be subject to speed pools in which they have very short lives. Housing bonds can be backed in U.S.-backed securities that make them very creditworthy. They can also be backed with some very old Section 8 Government Housing conditions that make them much riskier. It’s important to know the difference. You may read one of the articles in my Investment Strategies on Housing Bonds. This is a segment of the municipal market that can often be lucrative, but it requires some specialized Muni knowledge.

Question:
We have tax-free municipal bonds. Not sure what to do with them. Your opinion?

Answer:
If your tax bracket is 25% or higher, you generally should be investing in municipal bonds. If your tax bracket is below 25%, you generally should be investing in taxable bonds. It’s simple arithmetic. If you’re in the 25% tax bracket and you buy taxable bonds, there’s every possibility that the amount of interest that you get to keep after paying taxes will be LESS than the amount you get to keep from the interest earned from municipal bonds. Do a taxable equivalent yield calculation on any municipal bond (it’s easy to do) if you are questioning whether or not the Muni is still the best deal.

Question:
Do you like Munis for a couple 65 years old, and do you like them 10 to 12 years out?

Answer:
See the answer above. If your tax bracket is 25% or higher, go with Munis. If it’s below 25%, go with taxables. You need to build a laddered structure of bonds, whether they be Munis or any other kind, and it doesn’t make a difference if you’re 65, 25, or 105! You still need a ladder.

Question:
I have $100,000 in United States savings bonds. I’ve had them for five years. Should I cash them in and buy Munis or not?

Answer:
Do the arithmetic. Savings bonds are tax-deferred, not tax-free. Interest on Municipal Bonds is Federal tax free. What is your tax bracket? What are the rates of interest you can earn on each? Once you’ve listed all of the numbers and calculated them out, the math will tell you which one is better. See Taxable Equivalent and Tax-Free Equivalent Yields Calculated the Old Fashioned Way (2 separate articles) in Alister’s Investment Notes.

If your portfolio is greater than $500,000, Sharon Alister can provide a free analytic review to help ensure that your portfolio is in line with your investment goals. Call Sharon Alister at (800) 745-7110 or email info@AlisterTalksBonds.com

 

Interest Rates (Indications only)

Please note the rates for Ins’d and Pre-Res are not available from Bloomberg and will be updated as soon as possible.

Treasuries AAA Munis
3mo 1.815 N/A
6mo 2.009 N/A
1yr 2.237 1.74
2yr 2.482 1.87
5yr 2.809 2.19
10yr 2.970 2.53
30yr 3.145 3.14
today's rates chart

AAA Rated Munis

Pre-Res Ins’d Pure*
2 yr 1.91 2.05 1.87
5 yr 2.23 2.49 2.19
10 yr N/A 2.89 2.53
15 yr N/A 3.20 2.82
30 yr N/A 3.50 3.14

*Rated AAA on its own
Source: Bloomberg

Investing involves risk, including possible loss of principal. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. Conversely, as interest rates fall, bond prices will rise.

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