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Yield-to-call on secondary market vs. new issues

Q

I am retired and 75 years old. I rely on a large portfolio of municipal bonds and income from my deferred income accounts to maintain my style of living. I hold the bonds to maturity or call and never pay attention to price fluctuations. I buy only high-grade bonds, 100 bonds at a time, (Aa1 or AA+ or better) and only pay attention to coupons that will maintain my income. I buy bonds where the yield-to-call is close to yield on new issues due on the call date. This always means premium bonds. I now find that to get coupons of 4% or 5%, I pay a higher premium price. Since these bonds mature in 15 to 25 years, and I have older bonds with higher coupons, and I have cash equivalents and constant withdrawals from my IRAs, I have no difficulty maintaining the desired income level with minimal change in my net worth. I would be much interested in your opinion of this strategy. Following your lead I avoid laddering.

R.Z., Florida

A

James A. Klotz responds:

We are in complete agreement with your portfolio strategy. Our only question is in regard to your comment comparing yield-to-call on secondary market items to new issue bonds maturing in the same year. The yield-to-call on secondary market items should exceed the yield to maturity of a new issue maturing the same year.

Jun 22, 2005

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