Municipal Bond Forum
Risk vs. return rule still true
Q
One-year CDs pay just 1%. The other day, I was offered a 5% well-rated muni at par. That’s a great return, but it’s so different from what’s being offered at banks, that I’m scared because it’s too good and everything else is like in a different world of interest return. I have always believed that high return equals greater risk.
A
James A. Klotz responds:
You are correct. Higher returns do correlate with more risk. Your CDs are guaranteed by the federal government and are short-term money market instruments.
Although we are very comfortable with high quality long-term bonds with 5.00% tax-free yields, there is no question they are characterized by more credit and market risk. Where the munis come out on top is the overwhelming difference in income.
Start here.
Do you have specific criteria for bonds you’re looking for? Let us know and we’ll e-mail you bonds that fit your needs. There is no charge for this service.
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.