Forget about Municipal Bond Rates
By Avery Putnam
Municipal bond rates are not important when deciding what
municipal bonds to invest in. However, most people,
especially new municipal bond investors look at the
municipal bond rates before anything else and invest in the
bonds with the highest rates. While sometimes municipal
bonds with highest interest rates are the best investments,
it is not always the case. After all municipal bond rates do
not take into account the prices of the bonds and the
Municipal bond rates or municipal bond interest rates are
also called coupon rates. Coupon rates are published in
financial papers next to the name of the municipal bonds.
Municipal bond rates do not change over the life of the bond
and they are set at the time of the issue based on the needs
of the issuer. When the market condition changes, the
municipal bond rates still do not change.
Municipal bond rates do not always change to reflect the
risk associated with the bonds. Different bonds have
different characteristics such as maturity dates, interest
rates as well as prices. It is common sense to assume that
municipal bonds with higher risks should have higher
interest rates but this is no always the case. There are
plenty of municipal bonds that have different
characteristics such as longer maturity dates and higher
prices that have the same interest rates.
While the municipal bond rates may stay the same for all
maturity dates, the yield of the municipal bond should be
different. This is why advanced municipal bond investors
look at municipal bond yield more than their interest rates.
The yield calculation takes into account factors such as the
maturity date and price, unlike the coupon rates.
There is not just one type of yield to calculate, there are
a few. While municipal bond rates are published and states
without dispute, municipal bond yields can be calculated in
different ways. However in all yield calculations, the
municipal bond rates are used but they are then lowered by
the prices that investors have to pay for the bonds as well
as the time they have to wait to be repaid.
The price of a municipal bond can make the bond less
attractive even when the interest rate is high. Municipal
bonds can be bought at par, at premium or at a discount
price. If an investor is paying more for the bond, buying it
at premium, the investor should be compensated with high
enough interest rates so that in the end the investor comes
out ahead. For example, a $100 investment that pays you $1
for 10 days and also $100 at the end is better than a $30
investment that pays you $1 for 10 days and only $10 in at
the end. For an investor to invest $30, the bond needs to
pay more than $1 a day or pay for longer than 10 days. This
shows that considering municipal bond rates alone is not
Also, the longer the time to maturity, the higher the
municipal bond rates should be. For example, consider the
following investments. For a $10 investment you will get
your money back plus $1 a day for the 5 years or for the
same investment you will get $1 a day for the next 10 days.
In the latter case, you know you will get your money back
soon plus $10 more whereas in 5 years time things could have
changed tremendously. There may be other better investments
such as $2 a day interest which you cannot participate in
because you already lock in your money.
In conclusion, higher municipal bond rates do not always
mean better investments. It is better to consider the bond
yield rather than its coupon or interest rates. This is
especially true when an investor is investing long term.
Higher yield is needed to compensate the investor for taking
on more risk.
Municipal bonds have almost always been the favorite way of
investing for the very richest people on the planet for over
half a century. If you'd like to learn more about
Municipal Bond Rates, drop by
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