Municipal Bond Yields
Municipal bond yields are a little more
complicated to calculate than corporate bond yields. Because of
the tax benefits of municipal bonds, municipal bond yields will
always be less than the equivalent corporate bond yields. To
really know if a municipal bond is a better investment than a
corporate bond, you need to calculate the tax equivalent yield of the
municipal bond. Below are municipal bond yields explained.
What are Municipal Bond Yields?
Municipal bond yields expresses the cash
interest payments in relation to the municipal bond value.
Municipal bond yields are determined by the issuer's credit
quality, interest rates, time to maturity as well as any call
When there is a question whether
the municipal issuer will have the ability to pay
principal or interests, their municipal bonds often carry low
ratings but will offer higher municipal bond yields.
Municipal bond yields vs Municipal bond
There is a strong relationship between the
municipal bond yields and the municipal bond ratings. In
general, the higher the municipal bond rating, the lower the
municipal bond yield. This is because of the tradeoff of
having safety in the municipal bond. There is no such thing as
a safe investment with high returns so investors have to choose
either to put up with low ratings, high risks in exchange for
possible high yields or to have a peace of mind and invest in a
low yield municipal bond with high rating.
Different types of bond yields
Bond yields are used to compare tax exempt
municipal bonds returns against each other, against other
types of bonds or against other investments. Bond yields
are useful because, apart from at the initial bond offerings,
bonds trade at different prices, not just at par or face value.
The ability to buy a bond at par, premium prices or discount
prices make it hard to see at first glance how good an
investment a particular bond is. The different yield
calculations will help you determine which is the best bond to
The nominal yield is the bond's yield set at
the time of issue. This is a fixed percentage of the bond's par
value. A common yield of a bond is its current yield which
measures the bond's coupon payment relative to its market
price. Then there is the yield to maturity which
represents the annualized return of the bond if it were to be
held to maturity. Lastly, a useful yield is yield to call which
is calculated on bonds with call features. Another useful tool
to help you understand bonds and bond yields is the yield