Talking Finances

[7sins]

Originally Posted by albertf

Are you guys buying individual muni bonds or going with a bond fund?

The yields being presented on individual muni bonds look amazing but i'm worried that i'm missing something. No state income tax where i'm from so mainly focused on yield.

Individual muni bonds have a set maturity and call date when your principal is returned. This is not the case for bond funds that run into perpetuity with no maturity. Just be careful you aren't taken advantage of when buying individual muni bonds, ask your broker what the bid/ask spread is before purchasing and verify via the CUSIP on MSRB EMMA.

IE lets say you buy a 2 year individual muni bond at $101, you will receive $100 (par) back when the bond matures in two years. If the coupon is 5%, you receive 2.5% semi-annually until maturity. You have to factor in the premium you paid for the bond, thus you back out the $1 and that calculates your purchase yield to worst aka book yield. If you buy bonds at a discount, below $100, then your book yield is higher than your coupon as you amortize the discount back to par. IE a 4% bond purchased at $96 has a true book yield higher than 4% as you are getting $100 back at maturity, even though you only paid $96. As you would expect, the higher the coupon typically the higher the price depending on the maturity of the bond.