Municipal Bond Forum
Bonds for income, not capital gains
Q
Your article, Why Waiting Won’t Work, was great. It was certainly timely because I’m in the process of choosing munis. The Internet has been a poor location to find information on how to estimate potential profit if I sell a bond before maturity in, say, one or two years. I would need to estimate the price of the bond when I sell it. How would I do that? I’d like to figure out what my risk exposure is (in addition to bond rating, for example). In your article you say buy now, but how do I know that is the best strategy for the short term?
A
James A. Klotz responds:
Unfortunately, there is no good source to find information on estimating future profits or losses, since this data does not exist. Making this determination would require the ability to accurately predict the interest rate environment in future years. This is an exercise that no one has been able to perform successfully for any extended period of time. Your question, however, suggests a possible misunderstanding of how one should approach a bond investment.
Bonds are bought for income, not for capital gains. If you anticipate selling in two years, you should not be contemplating buying long-term bonds. At various times over the life of your bonds, they will be worth more than you paid for them, and sometimes less. The most attractive feature of municipal bond investing is the steady, dependable stream of tax-free income these bonds provide.
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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.