Municipal Bond Forum
Premium bonds
Q
I will retire in about five years and would like to have some income and also be able to keep the feds from taking so much. What do you think? My wife and I have a joint annual income of about $115,000, which puts us in the 25% federal tax bracket. We paid about $2,500 last year in federal taxes. I would like to buy muni bonds, about $75,000 worth, with a maturity date of about 10 years. I don’t mind paying premium prices based upon your explanations in other responses I read. However, will premium prices paid exceed the money we will make from interest earned over a 10-year period of time? Are munis suitable for us? I saw under one of your links – “insure bonds” – there was a column representing coupon, yield to maturity and, finally, worst yield. What is the difference between coupon and yield to maturity?
A
James A. Klotz responds:
The coupon rate is the fixed rate of return paid annually on the face value of the bond. This figure never varies regardless of the bond’s price. Price changes are reflected in the yield. When prices rise, yields drop.
When the yield is lower than the coupon rate, the bond trades at a premium price. If the yield is higher than the coupon rate, the bond trades at a discount.
The worst case yield reflects the lowest possible return that the bond investment can produce. This is usually the yield to call on premium bonds.
When buying premium bonds, every dollar invested (including premium dollars) is working at a rate at least equal to the worst case yield. Therefore, income earned will always exceed the premium paid.
For more on premium bonds, you may wish to read a past article on “Finding Value in this Market.“
Start here.
Do you have specific criteria for bonds you’re looking for? Let us know and we’ll e-mail you bonds that fit your needs. There is no charge for this service.
The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.
