Municipal Bond Forum
Upending conventional wisdom
Q
Can you please explain the bond return figures you quote glowingly in your commentary, “Man Bites Dog, Almost“? If you buy and hold a 4% bond to maturity, it returns 4%, etc. If I have to pay a premium for it, I realize even less. Am I missing something here in understanding my bond investments, or are you speaking in your article of people who trade bonds?
A
James A. Klotz responds:
When analytical services compute the performance of a fixed-income security, they do so on a “total return” basis. (This analysis assumes a bond is purchased on Jan. 1 of a given year and sold on Dec. 31.)
Obviously, neither you nor we adhere to this practice.
Actually, we were not speaking glowingly of these returns. We were quoting outside informational organizations and pointing out that bonds outperforming stocks flies in the face of widely held, though faulty, beliefs.
By the way, even if you pay a premium for a bond, you receive the full yield-to-maturity quoted on your confirmation.
Start here.
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