Municipal Bond Forum
Comparing yields
Q
I was told that you need to compare yields to worst case scenario (calls) rather than yields to maturity since bonds are priced to the worst-case scenario. Do you agree? If so, do you then suggest that I buy the highest “worst case” yield instead of the highest yield to maturity?
A
James A. Klotz responds:
It makes sense to look at both. As a premium bond investor, I want to buy bonds that yield 25 to 50 basis points more to the call (WCY) than the yield I can buy on a new issue bond, of comparable quality, maturing in that year.
The yield to maturity should also exceed the new issue yield to maturity.
Regarding what you refer to as “higher yields on smaller coupon bonds”: appreciation on discount bonds is subject to capital gains tax. This should be reflected in the yield-to-maturity.
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