Municipal Bond Forum
Why would heirs liquidate bonds?
Q
I’m thinking of buying long-term bonds but I’m worried that upon my death, my estate may have to sell the bonds at a loss if interest rates have risen above the bond interest. I understand that for every 1% rise in interest rate, bonds decrease 3%. Am I correct in this?
A
James A. Klotz responds:
You are correct in thinking that, as with any investment, the value of your municipal bonds will be subject to market conditions at any given time prior to maturity.
We are not sure, however, why you would assume that your heirs would liquidate the bonds rather than maintain them, and why the market value would be below your original cost. Long- term municipal bonds purchased over the past 10 to 20 years, if not previously called, could likely be sold today at substantial profits.
Another factor to consider is that during the period you enjoy the extra tax-free income afforded by long-term bonds, their market values will be increasingly supported as they approach maturity.
It is impossible to apply the type of “rule of thumb” you are attempting in your interest rate example. There are too many variables involved that determine the shape of the yield curve and the relationship between short- and long-term interest rates.
Additionally, we continually caution investors to avoid the futile pursuit of trying to predict interest rates.
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This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.