||Ask Dr. Don
Dear Dr. Don,
Are municipal bonds priced to yield 4.75 percent with 28 years until
maturity a good investment for a 70-year-old in the 28-31 percent
federal income tax bracket?
The interest income on municipal bonds is exempt from federal income
taxes, and is typically exempt from state and local taxes to residents
of the state where the issuing governments are located. (That's
not true for all 50 states.)
The Bond Market Association provides a listing
showing each state's income tax provisions for municipal bonds.
When in doubt, talk to your tax professional before investing in
That's especially true if you may be subject to the
alternative minimum tax (AMT) since the interest on some municipal
bonds is subject to the AMT.
The longer a bond's maturity, the more volatile its
price is to changes in interest rates. The bond's ability to increase
in price is mitigated by the fact that most long-term municipal
bonds have call provisions that allow the issuing governmental entity
to redeem the bonds prior to their stated maturity.
So if interest rates continue lower, these bonds could
be called away from you. (Callable municipal bonds are typically
protected from calls during the first seven to 10 years, and, if
called, may pay investors a small premium in addition to the face
value of the bond.)
If interest rates trend higher, then the bond isn't
called and you're holding an investment that has declined in value.
One long-term municipal bond shouldn't be the backbone
of your portfolio, regardless of your age, tax bracket, or the size
of your portfolio.
Creating a laddered portfolio where you are buying
short and intermediate maturities as well will keep you from making
large interest rate bets on a single maturity.
feature will give you more information about laddering a bond
-- Posted: Oct. 4, 2001