Here is some info. on muni bonds.
http://reports.finance.yahoo.com/z1...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
http://reports.finance.yahoo.com/z1...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
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Muni Bonds
- Thread starter Longhorns
- Start date
The non-callable Aug 09 TSY discount strip is at 3.924% YTM.
Equivalent munis clock in at about 3.000% YTM.
Two things account for the difference : federal tax + default risk
The haircut here is about 23% (0.77 x 3.924 = about 3).
So, without doing more precise math, you should buy munis roughly speaking if your tax bracket is higher than 23%
In case someone is wondering why the non-call zeros - they make for the easiest theoretical comparisons because you don't have to worry about reinvestment rate of return on the coupons or optionality or any other nasty stuff.
TSY Strip
http://reports.finance.yahoo.com/z1...ytl=-1&ytu=-1&mtl=48&mtu=60&rl=-1&ru=-1&cll=0
Muni zeros
http://reports.finance.yahoo.com/z1...ytl=-1&ytu=-1&mtl=48&mtu=60&rl=-1&ru=-1&cll=0
Equivalent munis clock in at about 3.000% YTM.
Two things account for the difference : federal tax + default risk
The haircut here is about 23% (0.77 x 3.924 = about 3).
So, without doing more precise math, you should buy munis roughly speaking if your tax bracket is higher than 23%
In case someone is wondering why the non-call zeros - they make for the easiest theoretical comparisons because you don't have to worry about reinvestment rate of return on the coupons or optionality or any other nasty stuff.
TSY Strip
http://reports.finance.yahoo.com/z1...ytl=-1&ytu=-1&mtl=48&mtu=60&rl=-1&ru=-1&cll=0
Muni zeros
http://reports.finance.yahoo.com/z1...ytl=-1&ytu=-1&mtl=48&mtu=60&rl=-1&ru=-1&cll=0
Student - for bonds with coupons I'm still seeing a haircut of 35% or so. You can also do a 'clean' comparison by looking at price and coupon. For example, a 2-year T-Note trading near par has a coupon of 3.75%
http://reports.finance.yahoo.com/z2...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
while a AAA non-callable muni near par has a coupon of around 2.38%
http://reports.finance.yahoo.com/z2...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
or about 36%, which corresponds quite well to the top federal rate of 35%.
It could be your zero calculation may not be as simple as you suppose -- given that Tsy strips are taxable for 'interest' that isn't actually paid.
http://reports.finance.yahoo.com/z2...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
while a AAA non-callable muni near par has a coupon of around 2.38%
http://reports.finance.yahoo.com/z2...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
or about 36%, which corresponds quite well to the top federal rate of 35%.
It could be your zero calculation may not be as simple as you suppose -- given that Tsy strips are taxable for 'interest' that isn't actually paid.
Jamis,
I think the TSY has 4 coupons to maturity while the Muni has 3.
The time effect on taxes on the OID accretion are miniscule at current rates and over such a short horizon.
I think the TSY has 4 coupons to maturity while the Muni has 3.
The time effect on taxes on the OID accretion are miniscule at current rates and over such a short horizon.
Quote from jamis359:
I guess I never understood the appeal of muni bonds. The yield is always discounted by an amount more or less equal to the top federal tax rate. While the after-tax yield of a T-bill or T-note is the same as a AAA muni bond, the risk of default is not. The Treasury bond is virtually risk free. Cities, counties and states do go into default from time to time.
Basically , munis are good if you are in 35% bracket.
As far as safety goes, go only with insured bonds .