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.
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