investing in Munis (bond, mutual fund, fees, dividend)
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I am not exactly new to investing in general, but am new to muni bonds. I have invested money in many different ways, but Munis are new to me, so I have what I assume is a basic question about them.
I am looking into buying (and holding until maturity) some Munis via Vangaurd (it seems their commissions are the lowest around), and am trying to figure out how the payments are made by the municipal. I am not interested in buying into a fund.
Lets say for example:
I buy a $1,000 bond, payments are made semi-annual, over 4 years (8 payments) at an interest rate of 5%. This would make the maturity value $1,050. when payments are made, can I expect the payments to be $125 + 2.5% interest = $131.25 for each payment? Or do I just collect the interest during the payments, ie:$25, and then get the principle at maturity?
This is the only part about muni bonds that confuse me. Any clarification would help. Thanks!
If you buy in a mutual fund you will receive your interest as it is paid into the fund. This could be monthly, quarterly or annually. You will have to check with the fund. You will NOT be paid any of your principal back EVER. They will keep buying new bonds with the principal. You sell your mutual shares to get your principal back. This will probably be less than you paid as interest rates should be going up over the next few years.
If you buy, as I think you are saying, the actual bond you will probably get an interest payment every 6 months and at maturity your principal back. I think it is better to buy individual bonds, seems you do too, but you have to pay attention to the fees.
You will not have any Federal income tax but depending on the state you could have state tax.
I am not exactly new to investing in general, but am new to muni bonds. I have invested money in many different ways, but Munis are new to me, so I have what I assume is a basic question about them.
I am looking into buying (and holding until maturity) some Munis via Vangaurd (it seems their commissions are the lowest around), and am trying to figure out how the payments are made by the municipal. I am not interested in buying into a fund.
Lets say for example:
I buy a $1,000 bond, payments are made semi-annual, over 4 years (8 payments) at an interest rate of 5%. This would make the maturity value $1,050. when payments are made, can I expect the payments to be $125 + 2.5% interest = $131.25 for each payment? Or do I just collect the interest during the payments, ie:$25, and then get the principle at maturity?
This is the only part about muni bonds that confuse me. Any clarification would help. Thanks!
You will be paid $25 every six months. At maturity you will get $1000 back.
Before you buy, you need to understand if they are callable and when and how much over or under par you will pay and the rating of the bond. There are lots of other features of bonds, but I always look at these first.
Can someone help me understand? This sort of relates to the OP although they said they don't want a bond fund.
PMF
Lists a $0.08125 dividend monthly. Going back 10 years it hasn't missed a payment. Seems the average is around $13-$15/share yielding between 6.5%-7.5%. I assume this is tax free as munis are. An effective rate @ 25% avg of around 9%.
Is this actually true? Let's say I buy $500,000 of PMF currently. Is it pretty rock solid at a yield of ~6.7% (current yield) or $2,800/month in tax free income?!? It held this payout through 2008-2009 which is remarkable. How are they getting over 6% when most new issuance bonds are much, much lower? Are they robbing from Peter to pay Paul to preserve the payout? Are yields high only because they own longer term munis that over time the payout will drop substantially as those bonds are repaid and replaced with current yielding 2% range?
Can someone help me understand? This sort of relates to the OP although they said they don't want a bond fund.
PMF
Lists a $0.08125 dividend monthly. Going back 10 years it hasn't missed a payment. Seems the average is around $13-$15/share yielding between 6.5%-7.5%. I assume this is tax free as munis are. An effective rate @ 25% avg of around 9%.
Is this actually true? Let's say I buy $500,000 of PMF currently. Is it pretty rock solid at a yield of ~6.7% (current yield) or $2,800/month in tax free income?!? It held this payout through 2008-2009 which is remarkable. How are they getting over 6% when most new issuance bonds are much, much lower? Are they robbing from Peter to pay Paul to preserve the payout? Are yields high only because they own longer term munis that over time the payout will drop substantially as those bonds are repaid and replaced with current yielding 2% range?
As they say, it just sounds too good to be true.
Leverage is the key. Also it's 5/10/15 year total returns are 7.6%/5.6%/7.1% in a bull bond market or tail end there of
pmf's total return this year is .57% . that is less than 1% . it lost almost 10% of its value the last 90 days . great when rates fall but terrible when they rise
Last edited by mathjak107; 12-21-2016 at 03:18 AM..
I am looking into buying (and holding until maturity) some Munis via Vangaurd
When you buy a bond fund, there is no holding of the bonds to maturity by you. Almost all bond funds are constant-maturity funds, meaning they maintain an average maturity of the bonds they hold. They maintain the target maturity by a lot of cycling of bonds. Some might be held to maturity but you have no control over that.
Quote:
I buy a $1,000 bond, payments are made semi-annual, over 4 years (8 payments) at an interest rate of 5%. This would make the maturity value $1,050. when payments are made, can I expect the payments to be $125 + 2.5% interest = $131.25 for each payment? Or do I just collect the interest during the payments, ie:$25, and then get the principle at maturity?
This is the only part about muni bonds that confuse me. Any clarification would help. Thanks!
Most bonds, including munis, pay a coupon (interest payment) twice per year. But there is a bond type called a "zero" or zero-coupon bond, which pays all its interest at maturity. Coupon munis are more common. But as with the case of holding-to-maturity, you have no control over this when you buy a bond fund. The fund manager will choose what type of bonds to buy. Even if the fund buys all zero-coupon bonds, you will still get yearly or quarterly distributions from the fund since some fraction of those bonds will mature every month, and the fund will be paid the coupons it is owed. Those are then passed on to you.
Note also that the payment schedule of a bond will be totally unrelated to the distribution schedule of the bond fund. Bonds often pay interest twice a year but the bond fund may choose to give out distributions 4x per year.
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