Sunday, June 5, 2011

Texas Municipal Bond - income & profit

          Municipal bonds are essential investments in the taxable accounts of income investors.  While all bonds including municipals are expensive; finding a good one requires quite a bit of work; opportunities for both income and profit do emerge now and then.

          I profiled an insured municipal, transportation bond issued by the State of Texas on January 20, 2011. (see Original Post)
This bond's coupon rate is 4.5% tax free and the maturity is 2035.  You can do the math and figure out your taxable equivalent income.  If you do not know how to that click on the tab "Stuff you should know" to find resources to help you.

          This week, I sold that bond for a 12% gain.  Remember that you are paid bond interest each day you own the bond (unlike dividend stocks) so I received the interest income over those 132 days.  Using the SIFMA site which provides trade prices on bonds, you can calculate the possible gains from this bond trade.

          On January 20, 2011 the trading range was $87.966 to $94.288.  On June 2, 2011 the trading range was $98.616 to $102.646.  I bought this bond because at the time the experts were scaring everyone about the solvency of governments including State and local governments.  I found two bonds I like that were selling at a discount (less than $100.)  Once was an Indiana bond and the other a Texas bond.  I bought the Texas bond at $90.122.  Clearly I did not buy at the absolute low but I did buy at what I thought was a nice discount.  If I held the bond to maturity, which means I would be paid $100, my capital gain would have been 9.878 percent plus the interest.

          I never intended to hold this bond to maturity.  Twenty four years is too long for me.  I prefer shorter terms but I thought I would be able to sell the bond at or near par well before the maturity date.

          Last week the experts were saying municipal bonds were getting over priced.  I reviewed my holdings and I sold the Texas bond at 101.  Again, I did not sell at the high of the day but I was able to sell at a premium to par.  My net gain was 12% plus the interest income during the 132 days I owned the bond.

          As an income investor, I love this kind of action and so should you.  The point of this post is to encourage you to review every income investment tool often.  Look for deals.  Keep track of your holdings and do not be afraid to take profit.

Very Truly Yours,


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