Municipal Bond Forum
Best time to sell?
Q
My muni bond portfolio pays out almost 5% annually and earns the equivalent of almost 7.5% in taxable income with little risk to my principal. Let’s say I have a bond with a face value at maturity of $50,000. The cost basis is $50,685, the current yield is 4.58%, the current value is $58,700, the estimated annual income is $2,688 and the “unrealized gain” is $8,015. The bond matures on 1/1/21. How do I determine the optimum time to sell these bonds? The unrealized gain will undoubtedly decline as I get closer to maturity. Also, if a bond matures on, say, 1/1/21, but is callable on 1/1/19, what does that mean?
A
James A. Klotz responds:
You’re to be commended: a 7.5% taxable-equivalent yield is enviable in today’s lower interest rate environment.
As you know from visiting our Web site, we don’t have an answer regarding when to sell, anymore than we know the right time to buy. Attempting to time interest rates is a futile exercise. The primary reason for owning bonds is the income.
Remember, regardless of the size of your gain, if you sell today you will not be able to replace the income you are now enjoying. There is a “bid” and “asked” spread in the market to overcome, as well as a tax that must be paid on the gain.
You are correct inasmuch as the price of your bonds will decline as they approach maturity. The callable date is the first time these bonds can be retired by the issuer.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.