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Municipal Bond Premiums Explained

April 15, 2021

For most types of bonds, the coupon rate is equal to the yield, and the bond is priced at its par value of $100. This would include most corporate and Treasury bonds. Muni bonds, however, are peculiar in that the coupon rate often exceeds the yield, causing the price to be greater than par.

As a result, most municipal bonds are priced greater than $100 at time of purchase. Yet when the bond matures, in addition to the coupon interest paid throughout the life of the bond, the investor will get back only the par value of $100.

This leads to a question many muni bond investors ask: “Why would I pay more than $100 for a bond that, when it eventually matures, returns only $100?” As this short video shows, there are several reasons this makes sense—and why avoiding these bonds means missing out on a key opportunity.

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