Municipal Bond Forum
Explaining ‘yield-to-worst’ muni bond yields
Q
In your most recent article, “Famous Names and the Investment They Favor,” you reference the Bloomberg Municipal Long Bond Index and mention “yield-to-worst, tax equivalent basis.” Can you explain these terms?
A
James A. Klotz responds:
The “yield to worst case” must be calculated by using a specialized bond calculator.
All premium bonds must be priced to the “worst case,” which is invariably the call date. This calculation is necessary as the bond may never reach maturity. (For more on premium bonds, see our article, “Seek Out the Misunderstood Premium Bonds.”) If bonds trade at a discount, “worst case” will be the yield to maturity.
The Bloomberg Municipal Long Bond Index simply tracks a compilation of long-term municipal bond yields. It gives investors an indication of the yields they can expect in the market, which, as we note in the article, are currently at levels we have rarely seen over the past many years.
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