Municipal bond coupon vs yield


Current Yield

This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value. Yield to maturity, or YTM, is the total return that you'll receive if you hold your bond until maturity and the issuer doesn't default.

The coupon rate is the interest rate that the bond pays. There is a difference between YTM and coupon rate. If the bond you're evaluating is trading on the secondary market it may be trading at either a premium or a discount to its par value. If it's trading at a premium the YTM will be less than the coupon rate and if it's trading at a discount, the YTM will be greater than the coupon rate.

Some bonds are callable, which means that the issuer has a right to buy your bond back from you before the maturity date. If the bond is callable, you can also calculate the yield to call, or YTC. For example, you could purchase a year bond that has a YTM of 4. Bonds can have multiple call dates or also be continuously callable. If there are multiple call dates, then you can calculate what the yield is for the worst possible call date known as the YTW, or yield to worst call.

Another term to understand if you're considering tax free bonds is the taxable equivalent yield, or TEY. The TEY is the yield that a taxable bond has to have for you to get the same after tax dollars as the tax-free bond gives you. Municipal bonds can be free of both federal and state income taxes depending on your state of residence and the state of issuance.

Explaining Bond Prices and Bond Yields

If you live in a state with no state income tax you can shop for municipal bonds from all 50 states. If you live in one of the states that does have a state income tax and want income that is free from both federal and state income tax, you'll be limited to purchasing bonds issued by your state of residence.

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Coupon and current yield only take you so far down the path of estimating the return your bond will deliver. For one, they don't measure the value of reinvested interest. They also aren't much help if your bond is called early—or if you want to evaluate the lowest yield you can receive from your bond.


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In these cases, you need to do some more advanced yield calculations. Fortunately, there is a spate of financial calculators available—some that even estimate yield on a before- and after-tax basis.

Understanding Yields

The following yields are worth knowing, and should be at your broker's fingertips:. Interest rates regularly fluctuate, making each reinvestment at the same rate virtually impossible. Such a figure is only accurately computed when you sell a bond or when it matures. You've probably seen financial commentators talk about the Treasury Yield Curve when discussing bonds and interest rates.

It's a handy tool because it provides, in one simple graph, the key Treasury bond data points for a given trading day, with interest rates running up the vertical axis and maturity running along the horizontal axis. A typical yield curve is upward sloping, meaning that securities with longer holding periods carry higher yield. In the yield curve above, interest rates and also the yield increase as the maturity or holding period increases—yield on a day T-bill is 2.

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Investors would want to weigh the risk of holding a bond for a long period see Interest Rate Risk versus the only moderately higher interest rate increase they would receive compared to a shorter-term bond. Sometimes economic conditions and expectations create a yield curve with different characteristics. For instance, an inverted yield curve slopes downward instead of up.

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When this happens, short-term bonds pay more than long-term bonds. Yield curve watchers generally read this as a sign that interest rates may decline.

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An Introduction to Bonds, Bond Valuation & Bond Pricing

The Department of Treasury provides daily Treasury Yield Curve rates , which can be used to plot the yield curve for that day. As with ETFs, muni-bond CEFs can be bought and sold at any time during market hours, with commissions and transaction costs no higher than those of your typical stock. Click here for more on why I prefer investing in CEFs. I have worked as an equity analyst for a decade, focusing on fundamental analysis of businesses and portfolio allocation strategies.

My reports are widely read by analy. I write on high yield assets that deliver a reliable income stream. Share to facebook Share to twitter Share to linkedin. Michael Foster.


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