Municipal Bond Forum
No loss when premium bonds mature
Q
In your discussion of investment yields on premium bonds, you do not mention the loss in principal from purchase price to par value when the bond is called or matures, i.e. a premium bond purchased for, say, 115.00 today will pay par, 100.00, when called or at maturity. Would this not reduce the overall return and, under certain circumstances, negate the additional yield on the premium bond?
A
James A. Klotz responds:
Technically, there is no loss of principal when your premium bonds mature at 100.00. You paid above par in order to receive “higher-than-market” interest income. These factors are part of the calculation of yield to maturity and yield to call. All invested dollars, including the premium, are working at these stated yields. Note: For a full discussion on premium bonds, visit “Hidden Gems in the Muni Market.”
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