Comments on: Muni Bonds and Garbled Journalism

By: Mitch Townsend

Mitch Townsend — Tue, 28 Aug 2007 01:43:03 +0000

A word of caution: unless you are paying Federal income taxes at the maximum rate, you probably don’t need municipal bonds. Why is that? Well, these bonds, like all securities, derive their value from what a willing buyer pays for them. Since these bonds have a tax preference as one of their features, they are bid up to the limit of where the tax benefit vanishes. It vanishes last for whoever pays the highest rate. All things being equal, a muni sells for the same as a taxable bond of similar quality, duration, and liquidity after taxes.

Taxable Equivalent Yield = yield/(100% – tax rate)

There isn’t much you can do to change the yield, but under a graduated tax regime, the tax rate changes. So the investor with the highest tax rate is looking at a better taxable equivalent yield than an investor with a lower tax rate.

By: Carl from Chicago

Carl from Chicago — Sun, 26 Aug 2007 16:56:51 +0000

That is an interesting article on bonds. If you go to our blog at http://www.lifeinthegreatmidwest.com and go under “investing” I have a number of articles where I also go through bond basics. I certainly don’t consider myself a bond expert, though.

By: david foster

david foster — Sun, 26 Aug 2007 16:17:10 +0000

I often see business-press articles which combine pretty advanced stuff with pretty simplistic stuff. It's sort of like reading an aviation article which combines the fine points of a Category II ILS approach with a reference to "the elevators, which are the flappy things on the tail." There seem to be a lot of people who are comfortable investing in stocks, but go into brain-freeze mode when the bond market comes up. I took a whack at explaining bonds here.