In your article “Hidden Gems in the Muni Market”, you state that a premium bond will produce about 50 basis points more yield than a comparable par bond maturing in the same year. However, as I see it, and what you don’t say, is that the 50 extra basis points comes from the premium that was paid in that, when the bond is called (at par or for less than the premium paid) or matures, the premium disappears or dissipates. In other words, I am merely trading some return of capital for more current income. It’s like taking the premium from the right hand and putting it in the left hand and calling it “additional yield.” Please convince me that I am making money by collecting less than I paid when I sell a bond or when it is called or matures at 100 when I paid, say, 105. As I see it, I am merely increasing my own current income with my own money taken from (by reducing) the premium part of the price that I paid for the bond. Is that why, as I understand it, the IRS does not allow a capital loss (of the lessened premium) to be deducted on my income tax because the so-called “loss” is really transformed into “current income” and, therefore, merely changes its nomenclature – not its value?
L.K., Maryland