Municipal Bond Forum
Premium vs. discount muni bonds
Q
Why would one choose to buy discount rather than premium municipal bonds, acknowledging that one might need to pay tax based on the de minimis rule? This will lower the final yield.
A
James A. Klotz responds:
The only reason to buy discount bonds that are subject to the de minimis rule is if the net return is equal to or exceeds the return on comparable securities on an after-tax basis.
As a rule, we have always suggested that premium bonds provide the most value in the municipal bond market. For more on premium bonds, see examples in our archive, e.g. “Hidden Gems in the Muni Market,” “Seek Out the Misunderstood Premium Bonds.”
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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.