Municipal Bond Premiums: Separating Fact from Fiction
Understanding premium municipal bonds can be difficult for even the most seasoned investors. Munis are underwritten with a laundry list of complexities such as yield, maturity, call date, duration, and credit. The myth that investors lose the premium at maturity isn’t only false, it may also lead to poor decision-making as focus shifts to avoiding premium municipal bonds altogether. Once investors can tell the difference between fact and fiction with regard to premium prices of municipal bonds, investors will be prepared to make decisions leading to better investment outcomes.
This paper aims to dispel common misconceptions about premium municipal bonds by explaining why most municipal issuance is underwritten with premium prices, how coupons factor into the relative value equation, and more.