Municipal Bond Forum
On Laddering When Rates are Flat
Q
In your laddering article, you wrote: “The fact is, laddering doesn’t work for municipal bonds. A more prudent approach to tax-free investing, whose wisdom has been borne out over time, is to maximize cash flow with every purchase.” Does that mean it’s better to buy higher interest, long-term tax-free bonds at a premium to maximize cash flow? Or is it better to buy lower interest tax-free bonds at par or a discount whose taxable equivalent yield is higher? That is to say, should I go for the bonds paying the highest interest (which are at a premium) or go for the bonds with the highest taxable equivalent yield?
A
James A. Klotz responds:
We have always favored premium bonds. Their larger coupons provide more cash flow, as you point out, and generally carry higher yields than comparable quality par or discount bonds.
Curiously, you will find that premium bonds are the answer for higher interest payments as well as better yields.
Start here.
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