How to Determine Actual Muni Bond Return?

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TreadLightly
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How to Determine Actual Muni Bond Return?

Post by TreadLightly » Mon Mar 19, 2018 9:41 pm

I'm new to investing and have a large portfolio given to us that I need to learn to manage. As when it was given to us, it has a large portion (almost 50%) in muni bonds. We're mid 30s, as I know you guys would like to know, but I'll make a separate post soon asking for a thorough (and no doubt earth-shaking) critique of what we have going on. For now, I'd like to know how to evaluate the return of a muni bond account.

For 2017 I'm getting 16% for two retirement accounts, 9% for a separate account, then 1% (!!!!!) for our muni bond account. So for all of 2017, almost 600k earned 1%. I'm dying. Please tell me it's not so simple to figure out return for this.

dbr
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Re: How to Determine Actual Muni Bond Return?

Post by dbr » Tue Mar 20, 2018 8:40 am

TreadLightly wrote:
Mon Mar 19, 2018 9:41 pm
I'm new to investing and have a large portfolio given to us that I need to learn to manage. As when it was given to us, it has a large portion (almost 50%) in muni bonds. We're mid 30s, as I know you guys would like to know, but I'll make a separate post soon asking for a thorough (and no doubt earth-shaking) critique of what we have going on. For now, I'd like to know how to evaluate the return of a muni bond account.

For 2017 I'm getting 16% for two retirement accounts, 9% for a separate account, then 1% (!!!!!) for our muni bond account. So for all of 2017, almost 600k earned 1%. I'm dying. Please tell me it's not so simple to figure out return for this.
That could be correct. There would be interest paid and some loss of asset value as interest rates have gone up a bit. It is the nature of investments that risk and return are a trade off and that different kinds of investments return and vary in return very differently from each other. Picking the mixture of different kinds of investments is the key step in an investment plan. It is called asset allocation.

The Vanguard Muni index fund had a last years return of about 2% and a 2018 YTD of about -1.5%.

I would suggest starting here and sytematically learning about the whole thing: https://www.bogleheads.org/wiki/Getting_started

retiredjg
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Re: How to Determine Actual Muni Bond Return?

Post by retiredjg » Tue Mar 20, 2018 9:45 am

I don't think you need to bother too much with this issue because you probably should NOT be holding muni bonds in the first place.

You are in a very low tax bracket and would make more money using taxable bonds not muni bonds (which are tax-exempt). Muni bonds are suitable for people in the higher brackets.

One reason the return may seem so low is that it is after-tax. Your other returns may be before tax. We don't really know how you did your calculations.

Considering that you have limited time before your trip and before tax day, I'd suggest that your time is better spent on other things.

I'm not suggesting you should not have bonds or some other kind of fixed income assets (like CDs). I'm suggesting that muni bonds are not appropriate in your situation (unless there is some twist we don't know about).

TreadLightly
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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Tue Mar 20, 2018 10:25 am

dbr wrote:
Tue Mar 20, 2018 8:40 am
TreadLightly wrote:
Mon Mar 19, 2018 9:41 pm
I'm new to investing and have a large portfolio given to us that I need to learn to manage. As when it was given to us, it has a large portion (almost 50%) in muni bonds. We're mid 30s, as I know you guys would like to know, but I'll make a separate post soon asking for a thorough (and no doubt earth-shaking) critique of what we have going on. For now, I'd like to know how to evaluate the return of a muni bond account.

For 2017 I'm getting 16% for two retirement accounts, 9% for a separate account, then 1% (!!!!!) for our muni bond account. So for all of 2017, almost 600k earned 1%. I'm dying. Please tell me it's not so simple to figure out return for this.
That could be correct. There would be interest paid and some loss of asset value as interest rates have gone up a bit. It is the nature of investments that risk and return are a trade off and that different kinds of investments return and vary in return very differently from each other. Picking the mixture of different kinds of investments is the key step in an investment plan. It is called asset allocation.

The Vanguard Muni index fund had a last years return of about 2% and a 2018 YTD of about -1.5%.

I would suggest starting here and sytematically learning about the whole thing: https://www.bogleheads.org/wiki/Getting_started
I watched all of the videos last night, and reach a good bit. Wow it's amazing to have such a calming person to teach this so well! I still have so many questions, like how to actually execute a lot of it. But I'm so ready to leave behind the million page monthly reports and the advisor who is trying to pick bonds on his own!

TreadLightly
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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Tue Mar 20, 2018 10:32 am

retiredjg wrote:
Tue Mar 20, 2018 9:45 am
I don't think you need to bother too much with this issue because you probably should NOT be holding muni bonds in the first place.

You are in a very low tax bracket and would make more money using taxable bonds not muni bonds (which are tax-exempt). Muni bonds are suitable for people in the higher brackets.

One reason the return may seem so low is that it is after-tax. Your other returns may be before tax. We don't really know how you did your calculations.

Considering that you have limited time before your trip and before tax day, I'd suggest that your time is better spent on other things.

I'm not suggesting you should not have bonds or some other kind of fixed income assets (like CDs). I'm suggesting that muni bonds are not appropriate in your situation (unless there is some twist we don't know about).
They were set up when owned by the super high tax bracket original owner. So that makes sense. To figure gains I just used start and end value if the account.

Based on the intro videos I should just have bond funds, which I get. I'm just so bummed that we never took over before!

I did open a Vanguard Roth out of excitement, now just waiting for CPA to say if we can find it!

rkhusky
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Re: How to Determine Actual Muni Bond Return?

Post by rkhusky » Tue Mar 20, 2018 2:00 pm

No need to rush into things. Vanguard's intermediate TE funds are now yielding more than 2%. You should probably put a big chunk into stocks, but need to figure out a plan first.

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Re: How to Determine Actual Muni Bond Return?

Post by MotoTrojan » Tue Mar 20, 2018 2:03 pm

I would just jump straight to the full portfolio critique.

nimo956
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Re: How to Determine Actual Muni Bond Return?

Post by nimo956 » Tue Mar 20, 2018 2:12 pm

There's no need to keep the inherited investments the same as the original owner had them. He/she had different needs from you (different tax considerations, different appetite for risk, etc.). If it were me I would have no hesitation in selling everything and reallocating the funds into investments that made sense for me.

Sometimes, with inheritances, people fall into the trap of becoming emotionally attached to the investments themselves. They thus become resistant to making any changes (ex. Grandpa chose to invest everything in AT&T, so I'll leave it there to honor his memory and keep my connection to him alive).
50% VTI / 50% VXUS

TreadLightly
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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Tue Mar 20, 2018 3:01 pm

nimo956 wrote:
Tue Mar 20, 2018 2:12 pm
There's no need to keep the inherited investments the same as the original owner had them. He/she had different needs from you (different tax considerations, different appetite for risk, etc.). If it were me I would have no hesitation in selling everything and reallocating the funds into investments that made sense for me.

Sometimes, with inheritances, people fall into the trap of becoming emotionally attached to the investments themselves. They thus become resistant to making any changes (ex. Grandpa chose to invest everything in AT&T, so I'll leave it there to honor his memory and keep my connection to him alive).
Fortunately, ours was a gift without a death. The reason we've left it the same is fear of losing what we've been given. But it's a great realization that it makes sense to change bc we have different needs. I'm buying into the three prong index fund idea praised in Taylor's gems. I hope it, or close to it, is a good plan bc wow it would be great to simplify and take the pressure off!

With what I've learned so far I'll make a better post to get info on revamping. I feel a little more educated and better prepared to start that conversation. I'm going to struggle with giving certain finer details on we have bc A) it's immensely spread out, and B) I swear they intentionally make it next to impossible to make sense of those lengthy summaries.

The idea of selling everything is kind of terrifying. I also have the job of convincing my husband to get into any funds at this point. I know we can't market time, I would just feel terrible to ditch our old set up, buy into the new one against his current belief, and hit a downturn!

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Kevin M
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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Tue Mar 20, 2018 4:12 pm

One percent seems low. Vanguard intermediate-term tax-exempt return was 4.64% for 2017, and limited-term tax-exempt was 2.12%. However, their short-term tax-exempt fund return was only 1.1%, so I guess if the portfolio is mostly very short-term munis 1% would be reasonable. Of course you have to consider the advisor's fee in your returns.

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Re: How to Determine Actual Muni Bond Return?

Post by Meg77 » Tue Mar 20, 2018 4:39 pm

1-2% seems about right. Remember that's tax free though. My mom just inherited a big portfolio of muni bonds - about 45 bonds in total maturing from 2018-2040 - but even though they are all paying around 5% coupons, the actual return she is getting (which I only know because the statements from this particular advisor detail it) is 1.96%. That's the Yield to Maturity, or the Market Yield on her statement (which is no longer visible since we rolled them all to Vanguard, for the record).

There is no easy way to calculate the total return of a bond though, to answer your question. Now if you buy a bond at origination with a 5% coupon and hold that bond until it matures, then your return is 5%. That's easy. But if you want to sell it prior to maturity or buy a bond from another investor after origination (or inherit some), that's where it gets tricky because the value of the bond will bounce around as market interest rates move. So it depends when it was purchased, for what price (for what discount or premium over the par), what the rate is and for what period you got that rate (some bonds can be called early) - there's a lot that goes into it if you really want an accurate annualized total return picture.
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Re: How to Determine Actual Muni Bond Return?

Post by Longdog » Tue Mar 20, 2018 7:33 pm

Realize that while 1% or so might seem like a very low return, if you are just starting investing then you will one day experience a stock market drop of 20% or more, in which case you might feel good not having some of your assets in low yielding bonds. I'm not suggesting that you should have a lot in bonds (munis or otherwise), but just trying to point out that the stock market returns may be terrific one year or many years, but there will likely be some doozies in there that could cause you angst.
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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Tue Mar 20, 2018 8:17 pm

Meg77 wrote:
Tue Mar 20, 2018 4:39 pm
1-2% seems about right. Remember that's tax free though. My mom just inherited a big portfolio of muni bonds - about 45 bonds in total maturing from 2018-2040 - but even though they are all paying around 5% coupons, the actual return she is getting (which I only know because the statements from this particular advisor detail it) is 1.96%. That's the Yield to Maturity, or the Market Yield on her statement (which is no longer visible since we rolled them all to Vanguard, for the record).

There is no easy way to calculate the total return of a bond though, to answer your question. Now if you buy a bond at origination with a 5% coupon and hold that bond until it matures, then your return is 5%. That's easy. But if you want to sell it prior to maturity or buy a bond from another investor after origination (or inherit some), that's where it gets tricky because the value of the bond will bounce around as market interest rates move. So it depends when it was purchased, for what price (for what discount or premium over the par), what the rate is and for what period you got that rate (some bonds can be called early) - there's a lot that goes into it if you really want an accurate annualized total return picture.
Yeah, I figured this. We hold them to maturity, and we have a balance of short, medium, and long term bonds. The open and close balance of the year is all I'm looking at (which does have fees subtracted). But I figured and hoped it's more complex than that.

As an aside, I'm trying to figure of what we're paying on fees, and this approx $550k account had like $780 in advisory fees for the year. Not complaining, but suspicious. Am I missing something?

EDIT: I have a vague memory of us signing something to reduce the fees for our accounts because they're just kind of sitting and not being actively managed. So maybe that's accurate? I just don't see how a firm would give rates that low regardless.

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Tue Mar 20, 2018 8:47 pm

TreadLightly wrote:
Tue Mar 20, 2018 8:17 pm
Meg77 wrote:
Tue Mar 20, 2018 4:39 pm
There is no easy way to calculate the total return of a bond though, to answer your question.
Yeah, I figured this. We hold them to maturity, and we have a balance of short, medium, and long term bonds. The open and close balance of the year is all I'm looking at (which does have fees subtracted). But I figured and hoped it's more complex than that.
I don't think Meg77 was really answering your question. That answer applies to forward-looking total return of a bond not held to maturity, which indeed is impossible to accurately predict. What you did for total return for 2017 (past, not future) was basically correct, with a few caveats.

First, there were no cash-flows into our out of the account, other than the fees. This requires that all interest and proceeds from maturing bonds remained in the account, either as cash or reinvested.

Next, muni bond pricing is not particularly accurate, as any particular muni bond may not trade very often. The price being used for a particular bond might be based on a trade a month or more ago. Also, even if the price is fairly recent you may not get that if you were to sell. You can look to see if there is a bid for the relevant quantity of a particular bond (lookup by CUSIP), and if there is, that's the price you'd get if you sold. Often there will be no bid displayed, so would have to call and have your broker solicit bids to see what you could actually sell the bond for. You could also look at bids for bonds that are very similar.

Finally, be sure to include accrued interest in both begin and end values, as this is part of the bond's current value. If you sold a bond, you would receive the accrued interest in addition to the bond principal.

So if all these things are considered, and your account grew from say $550K to $555,500, then yeah, you earned about 1%. Again, that seems low unless the average maturity of your bonds is about 1.5 years or less (average maturity for Vanguard short-term muni fund, for which I noted the 2017 return above).

Of course you should consider the taxable-equivalent return, which is higher, if you want to compare to taxable bonds.
As an aside, I'm trying to figure of what we're paying on fees, and this approx $550k account had like $780 in advisory fees for the year. Not complaining, but suspicious. Am I missing something?
If that's really all the fees, it's not too bad. It's only 0.14% (=780/550,000). So at least you're not paying the typical 1% of assets under management (AUM).

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TreadLightly
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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Tue Mar 20, 2018 9:34 pm

Kevin M wrote:
Tue Mar 20, 2018 8:47 pm
TreadLightly wrote:
Tue Mar 20, 2018 8:17 pm
Meg77 wrote:
Tue Mar 20, 2018 4:39 pm
There is no easy way to calculate the total return of a bond though, to answer your question.
Yeah, I figured this. We hold them to maturity, and we have a balance of short, medium, and long term bonds. The open and close balance of the year is all I'm looking at (which does have fees subtracted). But I figured and hoped it's more complex than that.
I don't think Meg77 was really answering your question. That answer applies to forward-looking total return of a bond not held to maturity, which indeed is impossible to accurately predict. What you did for total return for 2017 (past, not future) was basically correct, with a few caveats.

First, there were no cash-flows into our out of the account, other than the fees. This requires that all interest and proceeds from maturing bonds remained in the account, either as cash or reinvested.

Next, muni bond pricing is not particularly accurate, as any particular muni bond may not trade very often. The price being used for a particular bond might be based on a trade a month or more ago. Also, even if the price is fairly recent you may not get that if you were to sell. You can look to see if there is a bid for the relevant quantity of a particular bond (lookup by CUSIP), and if there is, that's the price you'd get if you sold. Often there will be no bid displayed, so would have to call and have your broker solicit bids to see what you could actually sell the bond for. You could also look at bids for bonds that are very similar.

Finally, be sure to include accrued interest in both begin and end values, as this is part of the bond's current value. If you sold a bond, you would receive the accrued interest in addition to the bond principal.

So if all these things are considered, and your account grew from say $550K to $555,500, then yeah, you earned about 1%. Again, that seems low unless the average maturity of your bonds is about 1.5 years or less (average maturity for Vanguard short-term muni fund, for which I noted the 2017 return above).

Of course you should consider the taxable-equivalent return, which is higher, if you want to compare to taxable bonds.
As an aside, I'm trying to figure of what we're paying on fees, and this approx $550k account had like $780 in advisory fees for the year. Not complaining, but suspicious. Am I missing something?
If that's really all the fees, it's not too bad. It's only 0.14% (=780/550,000). So at least you're not paying the typical 1% of assets under management (AUM).

Kevin
Is there a place for hidden costs for muni bonds?

Our maturity schedule is 73% 2-5 yrs, 27% 5-10 yrs. It seems like just comparing account value at start and end of the year isn't enough to consider based on the fact that we're waiting on them to mature? Some of how you explained determining the value of the bonds did exceed my current knowledge, but it's much appreciated!

The account earned $17300 income over the year, but the value rose only $6K, and the fees were $780ish, so the value reflected has got to reflect change in market value, which doesn't really impact their value to us if we buy and hold to maturity, right?

"Par value": 370,000 and estimated market value 408,856. Like i said, we usually just buy and hold to maturity, is this saying we'd get way more if we sold it?

Is this all moot? Do most of you just prescribe to buying a few index funds and leaving it at that (which sounds heavenly by the way, if it works)? You all seem so educated in the finer details of investing that it seems like you're all still doing more than just investing in a few index funds.

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Re: How to Determine Actual Muni Bond Return?

Post by dbr » Wed Mar 21, 2018 8:17 am

TreadLightly wrote:
Tue Mar 20, 2018 9:34 pm

Our maturity schedule is 73% 2-5 yrs, 27% 5-10 yrs. It seems like just comparing account value at start and end of the year isn't enough to consider based on the fact that we're waiting on them to mature? Some of how you explained determining the value of the bonds did exceed my current knowledge, but it's much appreciated!

The account earned $17300 income over the year, but the value rose only $6K, and the fees were $780ish, so the value reflected has got to reflect change in market value, which doesn't really impact their value to us if we buy and hold to maturity, right?

"Par value": 370,000 and estimated market value 408,856. Like i said, we usually just buy and hold to maturity, is this saying we'd get way more if we sold it?

Is this all moot? Do most of you just prescribe to buying a few index funds and leaving it at that (which sounds heavenly by the way, if it works)? You all seem so educated in the finer details of investing that it seems like you're all still doing more than just investing in a few index funds.
When you hold bonds they are worth today what you can sell them for today and they will be worth when they mature what they will be worth when they mature. The value today could be more or less than the value they will have at some other time. It is no more complicated than that. The value at a certain point in the future of many investments is known and the value in the future of other investments is not known. Those are just facts and you decide for yourself what the importance of those facts is to your financial planning.

A financial plan should look at your situation as a function of time starting with today, tomorrow, next month, next year and so on. It is not only one point in time. The value of your bonds today, tomorrow, etc. is what you can sell them for at that point in time. When that point in time corresponds to the date of maturity, then you get the face value. Any other time you don't. So most people keep the books accordingly with a plan in mind for how it will work out.

Yes, index funds are a very effective means to invest. Very few people have a requirement that exactly a certain amount of money needs to be recovered on exactly a certain date. Those people might meet that need by holding a specific bond to maturity on that date. The rest of us almost all the time have nothing to gain from doing this.
Last edited by dbr on Wed Mar 21, 2018 8:20 am, edited 1 time in total.

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Wed Mar 21, 2018 1:51 pm

TreadLightly wrote:
Tue Mar 20, 2018 9:34 pm
Our maturity schedule is 73% 2-5 yrs, 27% 5-10 yrs. It seems like just comparing account value at start and end of the year isn't enough to consider based on the fact that we're waiting on them to mature? Some of how you explained determining the value of the bonds did exceed my current knowledge, but it's much appreciated!

The account earned $17300 income over the year, but the value rose only $6K, and the fees were $780ish, so the value reflected has got to reflect change in market value, which doesn't really impact their value to us if we buy and hold to maturity, right?
It depends what you want to measure.

First, was the $17,300 in income retained in the account in some form, or was it distributed to you so it's no longer in the account. If the former, then your calculation of total return for 2017 is at least roughly correct. If the latter, then you need to add the 17,300 to the 6,000 to calculate your return. Technically, your return also would depend on the timing of the cash distributions, but as a first-order approximation you can ignore that.

If "value to us" only depends on value at maturity plus income, then why are you bothering to calculate total return for 2017? If you hold to maturity, your annualized return over the term to maturity will be approximately the yield to maturity at the beginning of the holding period, with the deviation depending on the rate of return on the reinvested coupon payments. But, if yields rise during the holding period, you will earn less than if you bought the bonds at the higher yields, and this is reflected in the decreased market value of the bonds.

What are you doing with the bond income and proceeds from maturing bonds? If reinvesting it in more bonds in the account, then total return is relevant, and is what you would use to compare to a bond mutual fund total return. In this case you are rolling your bonds, which is what a mutual fund does, although the fund may not hold the bonds to maturity; instead, they may sell the bond before maturity and buy a bond of longer maturity.
"Par value": 370,000 and estimated market value 408,856. Like i said, we usually just buy and hold to maturity, is this saying we'd get way more if we sold it?
No. You will get more principal if you sell now, but if you took that principal and reinvested in a similar bond today, you would earn less coupon income over the term to maturity, and you would come out about the same either way.

Your average bond price is 110.50 (110.5% of par value = 408,856/370,000), and your bonds will mature at a price of 100. The higher average price reflects the higher average coupon rate of the bonds compared to current coupon rates for similar new-issue bonds. So if you sold some bonds at 110.50 and used the proceeds to buy new bonds at 100 with the same term to maturity, both bonds would have about the same yield to maturity on the transaction date, meaning that you would earn about the same if held to the original maturity date, but the coupon rates of the new bonds would be lower. The higher coupon rates of the existing bonds compensate for the decline of value from 110.50 to 100 over the term to maturity, roughly equalizing the yield to maturity compared to the new bonds.
Is this all moot? Do most of you just prescribe to buying a few index funds and leaving it at that (which sounds heavenly by the way, if it works)? You all seem so educated in the finer details of investing that it seems like you're all still doing more than just investing in a few index funds.
Most people here stick to funds--it's more in line with the Boglehead principle of keeping investing simple. Some of us buy individual fixed-income securities for various reasons.

It's been pointed out that muni bonds don't make sense for you since you are in a low tax bracket. I assume that info was in another post, since I don't recall seeing it here. So you may be better off selling your muni bonds and buying a taxable bond fund. Or there may be some other solution depending on your overall financial situation, which I think you said you'd cover in another post.

You may have a capital gain or capital loss on the sale of the muni bonds. Since they were a gift, it will depend on the basis of whoever gifted them to you. You should consider that in making your decision. Also, the bid/ask spread can be fairly wide for muni bonds, meaning that you will lose some to transaction costs, in addition to whatever commissions you pay. The taxation aspects of muni bonds can be complicated, due to accrual of discount or premium at purchase, but this is true whether you hold the bonds or sell them.

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Re: How to Determine Actual Muni Bond Return?

Post by Artsdoctor » Wed Mar 21, 2018 2:51 pm

Tread,

You're in a bit of a mess here. First, you have investments you don't understand; second, the munis were gifted so you have the original owner's cost basis (I understand that these were gifted and not passed on from someone who died?).

I would not sell your individual munis until you fully understand what you have and what the tax ramifications of the sale will be. They actually may be good investments even though they're not optimal for you.

You can read "The Bond Book" by Annette Thau if you want more information on your individual bonds.

You can't really sell everything without understanding capital gains. It would be different if you inherited the portfolio (the cost basis is reset at the time of death and you're unlikely to owe much with any sales). I suspect that you might be sitting on some significant gains that are imbedded with those bonds; you may be in a low tax bracket now but selling everything would not keep it that way given the figures you've jotted down.

At the very least, go over this with your accountant.

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Re: How to Determine Actual Muni Bond Return?

Post by Meg77 » Wed Mar 21, 2018 3:06 pm

TreadLightly wrote:
Tue Mar 20, 2018 8:17 pm
Meg77 wrote:
Tue Mar 20, 2018 4:39 pm
1-2% seems about right. Remember that's tax free though. My mom just inherited a big portfolio of muni bonds - about 45 bonds in total maturing from 2018-2040 - but even though they are all paying around 5% coupons, the actual return she is getting (which I only know because the statements from this particular advisor detail it) is 1.96%. That's the Yield to Maturity, or the Market Yield on her statement (which is no longer visible since we rolled them all to Vanguard, for the record).

There is no easy way to calculate the total return of a bond though, to answer your question. Now if you buy a bond at origination with a 5% coupon and hold that bond until it matures, then your return is 5%. That's easy. But if you want to sell it prior to maturity or buy a bond from another investor after origination (or inherit some), that's where it gets tricky because the value of the bond will bounce around as market interest rates move. So it depends when it was purchased, for what price (for what discount or premium over the par), what the rate is and for what period you got that rate (some bonds can be called early) - there's a lot that goes into it if you really want an accurate annualized total return picture.
Yeah, I figured this. We hold them to maturity, and we have a balance of short, medium, and long term bonds. The open and close balance of the year is all I'm looking at (which does have fees subtracted). But I figured and hoped it's more complex than that.

As an aside, I'm trying to figure of what we're paying on fees, and this approx $550k account had like $780 in advisory fees for the year. Not complaining, but suspicious. Am I missing something?

EDIT: I have a vague memory of us signing something to reduce the fees for our accounts because they're just kind of sitting and not being actively managed. So maybe that's accurate? I just don't see how a firm would give rates that low regardless.
Most bond managers/companies make a substantial chunk of their money on the bid/ask spread when you buy the bond. Basically the rate you'll get is discounted and you never know or see it. A wealth group I used to work for charged AUM fees and would break down people's portfolios to show them that they actually weren't going to be paying more if they moved their money over. The bond managers could look at the bonds and run them through their system and see what the actual terms were and see how much the other manager was getting as a cut. But the client has no way to see that.
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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Wed Mar 21, 2018 4:45 pm

Kevin M wrote:
Wed Mar 21, 2018 1:51 pm
TreadLightly wrote:
Tue Mar 20, 2018 9:34 pm
It depends what you want to measure.

First, was the $17,300 in income retained in the account in some form, or was it distributed to you so it's no longer in the account. If the former, then your calculation of total return for 2017 is at least roughly correct. If the latter, then you need to add the 17,300 to the 6,000 to calculate your return. Technically, your return also would depend on the timing of the cash distributions, but as a first-order approximation you can ignore that.

No, see, there's a mention of 17,300 having been earned, but it's not reflected in the end of year account account value when compared to the start of the year, so I assume the market value of the account fell, obscuring the gain. We don't touch the accounts. The only thing withdrawn ever is a small amount of fees.

If "value to us" only depends on value at maturity plus income, then why are you bothering to calculate total return for 2017? If you hold to maturity, your annualized return over the term to maturity will be approximately the yield to maturity at the beginning of the holding period, with the deviation depending on the rate of return on the reinvested coupon payments. But, if yields rise during the holding period, you will earn less than if you bought the bonds at the higher yields, and this is reflected in the decreased market value of the bonds.

I don't really know why I did it. I'm really trying to get a grasp of what we have and how to evaluate how successful it is, and wasn't sure how to evaluate that account. I've sat down with the advisor multiple times trying to get a black and white idea on what we have going on, but I've decided just these last few days the reason I come away from those meetings more confused about what we have and what it's earning is because he's not actually trying to be transparent.

What are you doing with the bond income and proceeds from maturing bonds? If reinvesting it in more bonds in the account, then total return is relevant, and is what you would use to compare to a bond mutual fund total return. In this case you are rolling your bonds, which is what a mutual fund does, although the fund may not hold the bonds to maturity; instead, they may sell the bond before maturity and buy a bond of longer maturity.

everything stays in the account and is used to buy more bonds

Most people here stick to funds--it's more in line with the Boglehead principle of keeping investing simple. Some of us buy individual fixed-income securities for various reasons.

It's been pointed out that muni bonds don't make sense for you since you are in a low tax bracket. I assume that info was in another post, since I don't recall seeing it here. So you may be better off selling your muni bonds and buying a taxable bond fund. Or there may be some other solution depending on your overall financial situation, which I think you said you'd cover in another post.

You may have a capital gain or capital loss on the sale of the muni bonds. Since they were a gift, it will depend on the basis of whoever gifted them to you. You should consider that in making your decision. Also, the bid/ask spread can be fairly wide for muni bonds, meaning that you will lose some to transaction costs, in addition to whatever commissions you pay. The taxation aspects of muni bonds can be complicated, due to accrual of discount or premium at purchase, but this is true whether you hold the bonds or sell them.

Kevin
The idea of being mostly index funds is very enticing. It's going to be hard to relinquish my (false) sense of control, but the premise is logical and my feelings are not! I'm interested in learning about fixed income securities, and when they're appropriate. But from what they sound like I'd assume they're for ppl who are drawing off of them.

I'm excited about getting advice on our overall financial situation, but I'm intimidated about making that post!

Tax wise, we do anticipate an increased income to probably a reasonable 100K max over the next 5 years. I won't put too much faith in our advisor for advice on selling the bonds as he won't want us to leave, but I can only imagine our CPA's response when we tell him what we want to do!

Maybe you need our whole financial picture to answer this, maybe not: would it not be better to just let them all reach maturity and withdraw the cash as they do? Or since we won't be buying back in with more bonds, like you walked me through above, then we'll do well to sell them?

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Wed Mar 21, 2018 4:54 pm

Artsdoctor wrote:
Wed Mar 21, 2018 2:51 pm
Tread,

You're in a bit of a mess here. First, you have investments you don't understand; second, the munis were gifted so you have the original owner's cost basis (I understand that these were gifted and not passed on from someone who died?).

I would not sell your individual munis until you fully understand what you have and what the tax ramifications of the sale will be. They actually may be good investments even though they're not optimal for you.

You can read "The Bond Book" by Annette Thau if you want more information on your individual bonds.

You can't really sell everything without understanding capital gains. It would be different if you inherited the portfolio (the cost basis is reset at the time of death and you're unlikely to owe much with any sales). I suspect that you might be sitting on some significant gains that are imbedded with those bonds; you may be in a low tax bracket now but selling everything would not keep it that way given the figures you've jotted down.

At the very least, go over this with your accountant.
I will go into explicit detail with our accountant before selling anything. I hope there's a confidentiality law that prevents him from telling my father in law (the gifter, and his long-time client and friend) because he won't take well to it.

So by his cost basis it just means that we'll pay gains based on his purchase price?

As far as not understanding them, I really do believe our advisor has worked to make this as complicated as possible. At one point he said he'd have ML stop sending a certain type of report (the quarterly analysis I think) because it was causing us to have these meetings trying to clarify the medium-term success of our accounts because "there's more information in there than you need to keep up with." No I wasn't obsessing over short term fluctuations or anything, I was just trying to get a grasp on what we have, what it costs us, and how it's doing compared to index. I insisted he continue to send them. He does alot of jumping around when we discuss things, and either he has no idea what he's doing or he's trying to keep it muddy.

I'm very glad I found my way here and I have no doubt I'll feel better about our choices soon :)

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Wed Mar 21, 2018 5:00 pm

Meg77 wrote:
Wed Mar 21, 2018 3:06 pm
TreadLightly wrote:
Tue Mar 20, 2018 8:17 pm
Meg77 wrote:
Tue Mar 20, 2018 4:39 pm
1-2% seems about right. Remember that's tax free though. My mom just inherited a big portfolio of muni bonds - about 45 bonds in total maturing from 2018-2040 - but even though they are all paying around 5% coupons, the actual return she is getting (which I only know because the statements from this particular advisor detail it) is 1.96%. That's the Yield to Maturity, or the Market Yield on her statement (which is no longer visible since we rolled them all to Vanguard, for the record).

There is no easy way to calculate the total return of a bond though, to answer your question. Now if you buy a bond at origination with a 5% coupon and hold that bond until it matures, then your return is 5%. That's easy. But if you want to sell it prior to maturity or buy a bond from another investor after origination (or inherit some), that's where it gets tricky because the value of the bond will bounce around as market interest rates move. So it depends when it was purchased, for what price (for what discount or premium over the par), what the rate is and for what period you got that rate (some bonds can be called early) - there's a lot that goes into it if you really want an accurate annualized total return picture.
Yeah, I figured this. We hold them to maturity, and we have a balance of short, medium, and long term bonds. The open and close balance of the year is all I'm looking at (which does have fees subtracted). But I figured and hoped it's more complex than that.

As an aside, I'm trying to figure of what we're paying on fees, and this approx $550k account had like $780 in advisory fees for the year. Not complaining, but suspicious. Am I missing something?

EDIT: I have a vague memory of us signing something to reduce the fees for our accounts because they're just kind of sitting and not being actively managed. So maybe that's accurate? I just don't see how a firm would give rates that low regardless.
Most bond managers/companies make a substantial chunk of their money on the bid/ask spread when you buy the bond. Basically the rate you'll get is discounted and you never know or see it. A wealth group I used to work for charged AUM fees and would break down people's portfolios to show them that they actually weren't going to be paying more if they moved their money over. The bond managers could look at the bonds and run them through their system and see what the actual terms were and see how much the other manager was getting as a cut. But the client has no way to see that.
Ew. I have no problem paying for a service if you're upfront and worthwhile. If neither are true that's just a recipe for yuck.

Also, Kevin mentioned maybe paying commission if we sell our bonds. We have a no commission agreement, and only pay monthly advisory fees based on account value. Is there a hidden fee we may face for selling them, whether from the bond itself or ML (not talking about taxes)?

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Re: How to Determine Actual Muni Bond Return?

Post by Artsdoctor » Wed Mar 21, 2018 7:11 pm

Tread,

Individual munis can be tricky at first. On one hand, you're not paying an ongoing expense ratio that you might if investing in a mutual fund, but there are several ways to be "fleeced" (for lack of a better word).

You can certainly buy individual munis when they're auctioned and everyone will pay the same price. However, the vast majority of individual munis are purchased on the secondary market.

The pricing of individual munis can be opaque; this means that trying to find out what a fair price might be can be tricky. There's a website (EMMA) which will provide information on the latest sales prices but many investors will not check that out. So a fair price for purchasing and a fair price for selling can be difficult to ascertain. I think you mentioned that you have individual munis totally about $600,000; by selling them on the secondary market, you will probably be offered a lower price than what many would consider fair. Very large brokers can get decent prices but you're the little guy and will not. This difference between the sales price a big brokerage house will fetch and what you can get will be a few percentage points. Any sales on the secondary market for the little guy will almost never be "fair."

If the munis are going to mature in a couple of years, then I wouldn't sell them unless I felt they were just unsafe (the lower credit rating). However, for those maturing in a decade, you might want to sell but I would not do that until you're more familiar with the whole process.

Your accountant should not disclose what you do to your FIL. However, if they're really friends, I think it would naive to think that the topic wouldn't come up. No one gifts that amount of money without having the topic come up at least occasionally. You're going to really have to balance your relationship with him against the financial interest of your own, and I'm presuming you're discussing all of this with your husband (it's his father who gifted you the money?). At any rate, you're going to need to cost basis of everything he gifted you. Additionally, you're going to need to amortize those premium bonds as well so some bookkeeping will be inevitable.
Last edited by Artsdoctor on Wed Mar 21, 2018 7:35 pm, edited 1 time in total.

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Re: How to Determine Actual Muni Bond Return?

Post by Artsdoctor » Wed Mar 21, 2018 7:29 pm

Addendum:

I've just re-read your thread in detail. Let me clarify.

You are married to someone who's father gifted the two of you money, right? You're in your 30's so presumably this is to get you started, correct?

The money is held at ML (Merrill Lynch), yes?

If this is so, this is not just about money, it's about relationships. The money has been given to you by your in-law. And by your own admission, you're not exactly sure what you've been given but you want to get rid of it and invest it elsewhere. Is this not a recipe for disaster? Or did I read this wrong.

You might want to take your relationship with your spouse and in-laws into consideration here. It's a very generous gift and you'd hate to complicate your relationships based on money fiascos. In the best of circumstances, you'd sit down with your FIL and tell him what you'd like to do, out of respect. I don't see how he's not going to find out that you've sold what he's given you so you can forget that option.

Merrill Lynch will make money off the account. That's what they do. The best thing you might consider is taking the bond interest as it's paid to you out of the account and into your own account (Vanguard, for example), and then begin investing in a simple portfolio. It sounds as if the bonds will mature at various dates so when they mature, you'd take the matured bonds and also put them in your Vanguard account. If you want to keep it simple, just use Total Stock and Total International in your own account to get started, or whatever it takes to give you a reasonable allocation.

You don't want to do anything to screw up with your relationship with your FIL after he's gifted you a 6-digit portfolio. Your relationship with him is more important than your gifted portfolio.

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Wed Mar 21, 2018 8:07 pm

Meg77 wrote:
Wed Mar 21, 2018 3:06 pm
Most bond managers/companies make a substantial chunk of their money on the bid/ask spread when you buy the bond. Basically the rate you'll get is discounted and you never know or see it.
It is not necessarily true that you can't see the bid/ask spread, or that you can't see what dealers and larger investors aren paying for the bond. I've bought many individual munis at Vanguard and Fidelity in recent months, and I could not only see the bid/ask spreads, but I could see the most recent trades. Yes, the dealers take a nice cut, but I have been able to see that.

One interesting thing about the retail muni market (at least as I've observed at Vanguard and Fidelity), is that the best price/yield often is for the smallest quantities, like 5 or 10 bonds. I've bought several bonds where I've seen that I'm getting a much better price/yield than a much larger recent purchase, and/or a better price/yield than available to someone who wants to buy larger quantities (if they're even available).

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Wed Mar 21, 2018 8:55 pm

(I don't really like the colored reply thing, since it's harder to clarify who's saying what, so I'm just going to quote your part).
TreadLightly wrote:
Wed Mar 21, 2018 4:45 pm
No, see, there's a mention of 17,300 having been earned, but it's not reflected in the end of year account account value when compared to the start of the year, so I assume the market value of the account fell, obscuring the gain. We don't touch the accounts. The only thing withdrawn ever is a small amount of fees.
Ok, then the way you calculated the return is basically correct.

If you look at the transaction history of the account, you should be able to see the interest payments and proceeds from maturing bonds going into a cash account, and then money from that cash account being used to buy more bonds (or the value of the cash account increasing).

So yes, the market value of the bonds fell by the difference between the 17,300 in coupon payments and the change in account value (after factoring in the fees that were withdrawn from the account).

Your total return is a combination of income return and capital return (Vanguard actually breaks this down in the performance metrics it provides for its funds). Your income return always is positive, while your capital return can be positive or negative, and in your case, it was negative for 2017. So your total return was smaller than your income return, but still positive.
I don't really know why I did it. I'm really trying to get a grasp of what we have and how to evaluate how successful it is, and wasn't sure how to evaluate that account.
There is no "is"--there is only "was" and "will be". It seems to me that you did basically the correct calculation to measure the "was" for 2017. The "will be" part is determined largely by the yields to maturities of the bonds in the portfolio, assuming no defaults and that all bonds are held to maturity.

Clearly you are in over your head here. What you could do is tell the bond portfolio manager to stop buying any more bonds while you figure this out. Take all coupon payments (interest) and proceeds from maturing bonds and transfer it to your simplified portfolio at Vanguard or wherever you're setting that up. You could then start methodically evaluating the bonds to determine what to sell and what to hold. Even if you sell nothing, as the bonds mature, you will gradually shrink this overly-complex, possibly inappropriate bond portfolio, while gradually building up your simplified, more appropriate portfolio.

You also could do a "transfer in kind" of the entire bond portfolio to a low-cost, low-pressure broker. Unless you are going to have at least $500K of assets at Vanguard, I'd recommend Fidelity over Vangaurd, since their commission is $1 per bond ($1,000 face value) for all customers, while Vanguard charges $2 per bond unless you are Voyager Select status. You then eliminate the management fee, and get out from under this manager whom you don't seem to like much. Fidelity and Vanguard fixed-income brokers are quite helpful, and will not pressure you to continue to hold a portfolio of bonds that may not be appropriate for you.
everything stays in the account and is used to buy more bonds
OK, then looking at total return is an appropriate measure to compare performance against a muni bond fund of similar characteristics. Like I said, 1% for 2017 seems OK if average maturity is about 1.5 years, but not so good if it's longer, unless the bonds were of generally higher quality than the bond funds I mentioned earlier.
The idea of being mostly index funds is very enticing. It's going to be hard to relinquish my (false) sense of control, but the premise is logical and my feelings are not! I'm interested in learning about fixed income securities, and when they're appropriate. But from what they sound like I'd assume they're for ppl who are drawing off of them.
I'd say that generally that's true. A bond fund is basically a rolling bond ladder, which is basically what you've got. The key things are getting the term risk (duration) and credit risk (default risk) right for your situation and views, and of course only using muni bonds in taxable accounts, and only if your marginal tax rates warrant it.

One advantage of using individual securities is that you can take advantage of specific types of securities for specific situations. For example, CDs currently have higher yields than Treasuries at 2-year maturities and beyond, which can be an advantage for a retail investor (institutional investors can't take advantage of FDIC insurance, so CDs are not risk free for them). But for most people, especially those getting started with investing, bond funds probably are the most appropriate solution, since they're much simpler. Also, the stock portion of your portfolio probably is going to have a much larger impact on your long-term returns, so it may not be worth messing around too much with the complexity of individual fixed-income securities.
Tax wise, we do anticipate an increased income to probably a reasonable 100K max over the next 5 years. I won't put too much faith in our advisor for advice on selling the bonds as he won't want us to leave, but I can only imagine our CPA's response when we tell him what we want to do!
You need to look at the big picture. There's a tradeoff betwen paying any capital gains taxes on selling the bonds and the higher after-tax returns you'd get by switching from muni bonds to investment grade bonds (or CDs). This may not be a simple thing to figure out, but if you can provide more details about the bond portfolio, people here may be able to help. For example, maybe there are some more recently purchased bonds that actually have losses that could offset the gains of selling some of the bonds purchased longer ago.

To make these decisions, you really need to understand your basis in the bonds in the portfolio, which for the bonds that were purchased before they were gifted to you, depends on the basis of the giftor, along with any accrual of premiums or discounts. Hopefully your CPA can help you with this.
Maybe you need our whole financial picture to answer this, maybe not: would it not be better to just let them all reach maturity and withdraw the cash as they do? Or since we won't be buying back in with more bonds, like you walked me through above, then we'll do well to sell them?
I think what I said just above applies here. For bonds maturing fairly soon, it probably makes sense to just let them mature, to avoid what you'll lose to transaction costs if you sell (bid/ask spread plus commission). For bonds maturing several years from now, you may make up for the transaction costs and any capital gains taxes with higher after-tax yields, but it's not necessarily simple to figure this out.

Definitely stop all reinvestments in this bond portfolio, as discussed above, and then you can take your time to figure out what to do with the longer-maturity bonds.

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Wed Mar 21, 2018 9:26 pm

Artsdoctor wrote:
Wed Mar 21, 2018 7:11 pm
Tread,

Individual munis can be tricky at first. On one hand, you're not paying an ongoing expense ratio that you might if investing in a mutual fund, but there are several ways to be "fleeced" (for lack of a better word).

You can certainly buy individual munis when they're auctioned and everyone will pay the same price. However, the vast majority of individual munis are purchased on the secondary market.

The pricing of individual munis can be opaque; this means that trying to find out what a fair price might be can be tricky. There's a website (EMMA) which will provide information on the latest sales prices but many investors will not check that out. So a fair price for purchasing and a fair price for selling can be difficult to ascertain. I think you mentioned that you have individual munis totally about $600,000; by selling them on the secondary market, you will probably be offered a lower price than what many would consider fair. Very large brokers can get decent prices but you're the little guy and will not. This difference between the sales price a big brokerage house will fetch and what you can get will be a few percentage points. Any sales on the secondary market for the little guy will almost never be "fair."

If the munis are going to mature in a couple of years, then I wouldn't sell them unless I felt they were just unsafe (the lower credit rating). However, for those maturing in a decade, you might want to sell but I would not do that until you're more familiar with the whole process.

Your accountant should not disclose what you do to your FIL. However, if they're really friends, I think it would naive to think that the topic wouldn't come up. No one gifts that amount of money without having the topic come up at least occasionally. You're going to really have to balance your relationship with him against the financial interest of your own, and I'm presuming you're discussing all of this with your husband (it's his father who gifted you the money?). At any rate, you're going to need to cost basis of everything he gifted you. Additionally, you're going to need to amortize those premium bonds as well so some bookkeeping will be inevitable.
For our equities the basis is listed in our reports. I'll check for the bonds. I'll really need some tax advice on the munis, and maybe even a meeting with a financial advisor who's getting nothing more from me than $$$ for a meeting. Maybe we should also seek our tax advice from a different CPA. If we wound up selling alot, we'll have to make decisions. I have little faith that if we sold everything, that wouldn't come up with my FIL. Of course, when I say I and me, I mean we and us, it's just habit to say I. Maybe letting things mature and pulling cash out when they do may be a safe bet for our relationship with FIL, and simplify the tax issue.

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Wed Mar 21, 2018 9:39 pm

Artsdoctor wrote:
Wed Mar 21, 2018 7:29 pm
Addendum:

I've just re-read your thread in detail. Let me clarify.

You are married to someone who's father gifted the two of you money, right? You're in your 30's so presumably this is to get you started, correct?

The money is held at ML (Merrill Lynch), yes?

If this is so, this is not just about money, it's about relationships. The money has been given to you by your in-law. And by your own admission, you're not exactly sure what you've been given but you want to get rid of it and invest it elsewhere. Is this not a recipe for disaster? Or did I read this wrong.

You might want to take your relationship with your spouse and in-laws into consideration here. It's a very generous gift and you'd hate to complicate your relationships based on money fiascos. In the best of circumstances, you'd sit down with your FIL and tell him what you'd like to do, out of respect. I don't see how he's not going to find out that you've sold what he's given you so you can forget that option.

Merrill Lynch will make money off the account. That's what they do. The best thing you might consider is taking the bond interest as it's paid to you out of the account and into your own account (Vanguard, for example), and then begin investing in a simple portfolio. It sounds as if the bonds will mature at various dates so when they mature, you'd take the matured bonds and also put them in your Vanguard account. If you want to keep it simple, just use Total Stock and Total International in your own account to get started, or whatever it takes to give you a reasonable allocation.

You don't want to do anything to screw up with your relationship with your FIL after he's gifted you a 6-digit portfolio. Your relationship with him is more important than your gifted portfolio.
OK, just read this one, and you and I came up with a similar idea on cashing out the bonds as they mature. Great idea also to harvest the interest income.

For what's its worth, we've left ML before, then switched back bc the new firm failed to disclose something prior to switching and we said nope when we found out. FIL was consulted before the switch and he essentially said "it's your money, do what you think is best. If you like him, maybe I'll put some money there too." Likewise we've had problems with the CPA firm (his CPA doesn't really do our taxes, another one at the firm does but his senior CPA reviews them to be sure ours mesh with his when needed), and when we discussed leaving he respectfully said make your own decisions.

Now, this may be different when it comes to "yeah, we're ultimately selling everything you worked so hard to put together, and yeah we're gonna manage it ourselves." We're already really different from his super earner lifestyle, and this may be the final straw lol. Our advisor would prob down-talk us pretty hard to him too, since the advisor knows who's going to be owning the rest of the money in the next few decades. He's not going to let us go easily.

We're going to have to balance btwn best investment choices, and best relationship choices. Thanks for your advice on both the financial and relationship aspects.

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Wed Mar 21, 2018 10:16 pm

Kevin M wrote:
Wed Mar 21, 2018 8:55 pm
(I don't really like the colored reply thing, since it's harder to clarify who's saying what, so I'm just going to quote your part).
(ok, noted. i'm new to forums and not really sure on the proper thing to do when the quoting back and forth gets long.)
You also could do a "transfer in kind" of the entire bond portfolio to a low-cost, low-pressure broker. Unless you are going to have at least $500K of assets at Vanguard, I'd recommend Fidelity over Vangaurd, since their commission is $1 per bond ($1,000 face value) for all customers, while Vanguard charges $2 per bond unless you are Voyager Select status. You then eliminate the management fee, and get out from under this manager whom you don't seem to like much. Fidelity and Vanguard fixed-income brokers are quite helpful, and will not pressure you to continue to hold a portfolio of bonds that may not be appropriate for you.
are there any fees associated with a transfer in kind? our fees for 2017 are very low. i don't quite understand why or how. the average value of the account was around $569,500, according to our summary we paid $750.05 in advisor fees, which is a cool .13%. is it possible there is a fee that is not listed on the ledger? seems crazy. the fees are similarly low for our other accounts, and none for the IRA. my husband says it's bc our accounts are not actively managed, plus he's trying to woo us knowing that if he keeps us he'll keep the big accounts (FIL) when we get them. i worry about something hidden, bc as someone mentioned above, ML isn't holding our accounts for free.

so if we've already maybe lost something when the advisor bought the bonds and maybe he pocketed some of the discount on the bond, that's done with. is there any benefit to moving the bonds themselves still? we'll definitely move the cash.

we're friendly with the manager, although we think he's a little dingy. but the more i start to wonder if he's not as forthcoming as I'd thought, the more my feelings change.
You need to look at the big picture. There's a tradeoff betwen paying any capital gains taxes on selling the bonds and the higher after-tax returns you'd get by switching from muni bonds to investment grade bonds (or CDs). This may not be a simple thing to figure out, but if you can provide more details about the bond portfolio, people here may be able to help. For example, maybe there are some more recently purchased bonds that actually have losses that could offset the gains of selling some of the bonds purchased longer ago.

To make these decisions, you really need to understand your basis in the bonds in the portfolio, which for the bonds that were purchased before they were gifted to you, depends on the basis of the giftor, along with any accrual of premiums or discounts. Hopefully your CPA can help you with this.

Kevin
i'll grab the bonds and give info on what we've got. please let me know how I should do this. should i include everything like bond name, quantity, basis, est. market price, est. market value, est. annual income, est. annual yield%?

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Re: How to Determine Actual Muni Bond Return?

Post by Meg77 » Thu Mar 22, 2018 3:52 pm

Kevin M wrote:
Wed Mar 21, 2018 8:07 pm
Meg77 wrote:
Wed Mar 21, 2018 3:06 pm
Most bond managers/companies make a substantial chunk of their money on the bid/ask spread when you buy the bond. Basically the rate you'll get is discounted and you never know or see it.
It is not necessarily true that you can't see the bid/ask spread, or that you can't see what dealers and larger investors aren paying for the bond. I've bought many individual munis at Vanguard and Fidelity in recent months, and I could not only see the bid/ask spreads, but I could see the most recent trades. Yes, the dealers take a nice cut, but I have been able to see that.

One interesting thing about the retail muni market (at least as I've observed at Vanguard and Fidelity), is that the best price/yield often is for the smallest quantities, like 5 or 10 bonds. I've bought several bonds where I've seen that I'm getting a much better price/yield than a much larger recent purchase, and/or a better price/yield than available to someone who wants to buy larger quantities (if they're even available).

Kevin
Thanks for the info; that is interesting. It's good to know that you may be able to see the spread in real time before making or confirming a purchase, but I was talking specifically about a managed bond portfolio where you wouldn't really have access to that data unless you know to ask. And on an inherited portfolio like my mom's or the OP's, you wouldn't really be able to tell looking back (without access to systems on which you can look it up) what the true bid/ask was versus what you actually paid.

Good tip about the smaller lots. I've debated whether to try to reinvest my mom's money for her into more individual munis or just dump it into a bond index.
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Re: How to Determine Actual Muni Bond Return?

Post by Meg77 » Thu Mar 22, 2018 3:55 pm

TreadLightly wrote:
Wed Mar 21, 2018 5:00 pm
Meg77 wrote:
Wed Mar 21, 2018 3:06 pm
TreadLightly wrote:
Tue Mar 20, 2018 8:17 pm
Meg77 wrote:
Tue Mar 20, 2018 4:39 pm
1-2% seems about right. Remember that's tax free though. My mom just inherited a big portfolio of muni bonds - about 45 bonds in total maturing from 2018-2040 - but even though they are all paying around 5% coupons, the actual return she is getting (which I only know because the statements from this particular advisor detail it) is 1.96%. That's the Yield to Maturity, or the Market Yield on her statement (which is no longer visible since we rolled them all to Vanguard, for the record).

There is no easy way to calculate the total return of a bond though, to answer your question. Now if you buy a bond at origination with a 5% coupon and hold that bond until it matures, then your return is 5%. That's easy. But if you want to sell it prior to maturity or buy a bond from another investor after origination (or inherit some), that's where it gets tricky because the value of the bond will bounce around as market interest rates move. So it depends when it was purchased, for what price (for what discount or premium over the par), what the rate is and for what period you got that rate (some bonds can be called early) - there's a lot that goes into it if you really want an accurate annualized total return picture.
Yeah, I figured this. We hold them to maturity, and we have a balance of short, medium, and long term bonds. The open and close balance of the year is all I'm looking at (which does have fees subtracted). But I figured and hoped it's more complex than that.

As an aside, I'm trying to figure of what we're paying on fees, and this approx $550k account had like $780 in advisory fees for the year. Not complaining, but suspicious. Am I missing something?

EDIT: I have a vague memory of us signing something to reduce the fees for our accounts because they're just kind of sitting and not being actively managed. So maybe that's accurate? I just don't see how a firm would give rates that low regardless.
Most bond managers/companies make a substantial chunk of their money on the bid/ask spread when you buy the bond. Basically the rate you'll get is discounted and you never know or see it. A wealth group I used to work for charged AUM fees and would break down people's portfolios to show them that they actually weren't going to be paying more if they moved their money over. The bond managers could look at the bonds and run them through their system and see what the actual terms were and see how much the other manager was getting as a cut. But the client has no way to see that.
Ew. I have no problem paying for a service if you're upfront and worthwhile. If neither are true that's just a recipe for yuck.

Also, Kevin mentioned maybe paying commission if we sell our bonds. We have a no commission agreement, and only pay monthly advisory fees based on account value. Is there a hidden fee we may face for selling them, whether from the bond itself or ML (not talking about taxes)?
Not that I know of. The commission fee may be hidden in the sense that the proceeds from the sale may just be discounted by $100 or whatever the trade fee is. But if you ask what the commission is to sell (if any), they'll tell you up front, and you may be able to find the info on their website.
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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Thu Mar 22, 2018 5:30 pm

TreadLightly wrote:
Wed Mar 21, 2018 10:16 pm
Kevin M wrote:
Wed Mar 21, 2018 8:55 pm
(I don't really like the colored reply thing, since it's harder to clarify who's saying what, so I'm just going to quote your part).
(ok, noted. i'm new to forums and not really sure on the proper thing to do when the quoting back and forth gets long.)
Some long-time forum members do it, but I don't know why. It becomes difficult if you want to easily use quotes to reply, and keep track of which quote applies to which poster.
are there any fees associated with a transfer in kind?
ML may charge a fee, like an account closing fee, but usually these are small, like $50. You can ask them. There is no fee on the receiving end. You initiate the transfer from the receiving broker, and usually you don't even have to talk to the existing broker, but in your case, given that you have some relationship with him, you might choose to. Fidelity would gladly help you work through this, although it can all be done online if you know what you're doing.
our fees for 2017 are very low. i don't quite understand why or how. the average value of the account was around $569,500, according to our summary we paid $750.05 in advisor fees, which is a cool .13%.
Yes, I mentioned upthread that the fee was low as far as money managers go. It wouldn't be a problem if you felt the manager was adding value, and you trusted him. Otherwise, the fee at Fidelity or Vanguard (or Scwhab and others) is 0%.
is it possible there is a fee that is not listed on the ledger?

I would hope not. There may be larger bid ask spreads and possibly commissions. Any commission should be shown in the order confirmation for the purchase. You should be able to get the order confirmations online if you have a login to your account, and otherwise they should be provided to you some other way.

If there are any somewhat-recently purchased bonds, provide the CUSIP, and ideally the order confirmation, and I'd be happy to look at recent trades, which may help get a sense of what kind of deal you're getting on bond purchases. I just checked a random CUSIP for a bond I own, and I can see trades as far back as 5/4/2017. Feel free to PM me with this and similar info if you don't want to share on the forum.
is there any benefit to moving the bonds themselves still? we'll definitely move the cash.
I think only if you might want to sell the bonds or not have to pay the management fee. Again, there are no management fees to hold a portfolio of bonds at Fidelity or similar brokers. In terms of selling the bonds, we might be able to use the info discussed above to see if the prices you're paying are comparable to what you'd pay at Fidelity, which should also give some idea of the comparison to what you'd get if you were to sell.

If you're not going to buy any more bonds in this account, then there's really no point in paying a management fee.
i'll grab the bonds and give info on what we've got. please let me know how I should do this. should i include everything like bond name, quantity, basis, est. market price, est. market value, est. annual income, est. annual yield%?
There should be a way to download the bonds into a spreadsheet format, like a csv file, if you have online access. An important field is the CUSIP, as this uniquely identifies a bond, and enables a lookup of any current bid/ask, recent trades, etc. Quantity is good. If you have basis, that's great, since that will help figure out gain or loss on any sales. Having the market price is somewhat useful, but as mentioned previously, market prices can be stale, but it's better than nothing (although if there are recent trades those can be used to estimate market value).

No need for annual income, as that is directly determined by the coupon rate and quantity. Providing coupon rate would be useful, although this is easy to look up given the CUSIP.

Maturity date is also useful, but can by looked up from the CUSIP.

Yield to maturity can be computed from price, coupon and maturity, but if it's displayed, sure, include it.

Again, we can take this offline if you prefer.

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Thu Mar 22, 2018 10:11 pm

Kevin M wrote:
Thu Mar 22, 2018 5:30 pm

Again, we can take this offline if you prefer.

Kevin
Should I put it up here or on PM? I'm not sure how sensitive this info is.

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Thu Mar 22, 2018 11:47 pm

viewtopic.php?f=1&t=245035

I've laid it all out here as best as I can!

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Fri Mar 23, 2018 3:34 pm

TreadLightly wrote:
Thu Mar 22, 2018 11:47 pm
viewtopic.php?f=1&t=245035

I've laid it all out here as best as I can!
OK, good enough. I've managed to load the muni bonds into a spreadsheet, and have started doing some calculations. There are some key fields missing (e.g., maturity), but I can look all that up with the CUSIP. I have a few quick observations. Do you want to discuss here or in the other thread?

One thing not provided is one or more order confirmations for any of the bond purchases. I don't know if you want to pursue this, but that might give us an idea of the fairness of the pricing you're getting. If you didn't buy any bonds in 2017, then it might be a moot point. You could always sell one of the longer-maturity bonds, ideally one that's traded recently or that has a current bid/ask (which I can look into), and we can compare to the pricing I see at Fidelity. The point here is to help you decide whether or not to switch brokers before selling the longer-maturity bonds, if that's what you decide to do.

Also useful would be your transaction history for 2017, if you can get it. This would show all transactions, including any deductions for fees.This might be something you want to provide on a shared cloud drive or as an attachment to an email, if you want to pursue it. The idea is to be able to definitively answer your question about any hidden fees or costs.

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Fri Mar 23, 2018 9:28 pm

Kevin M wrote:
Fri Mar 23, 2018 3:34 pm
TreadLightly wrote:
Thu Mar 22, 2018 11:47 pm
viewtopic.php?f=1&t=245035

I've laid it all out here as best as I can!
OK, good enough. I've managed to load the muni bonds into a spreadsheet, and have started doing some calculations. There are some key fields missing (e.g., maturity), but I can look all that up with the CUSIP. I have a few quick observations. Do you want to discuss here or in the other thread?

One thing not provided is one or more order confirmations for any of the bond purchases. I don't know if you want to pursue this, but that might give us an idea of the fairness of the pricing you're getting. If you didn't buy any bonds in 2017, then it might be a moot point. You could always sell one of the longer-maturity bonds, ideally one that's traded recently or that has a current bid/ask (which I can look into), and we can compare to the pricing I see at Fidelity. The point here is to help you decide whether or not to switch brokers before selling the longer-maturity bonds, if that's what you decide to do.

Also useful would be your transaction history for 2017, if you can get it. This would show all transactions, including any deductions for fees.This might be something you want to provide on a shared cloud drive or as an attachment to an email, if you want to pursue it. The idea is to be able to definitively answer your question about any hidden fees or costs.

Kevin
all bonds were purchased in 2012 and 2013. i'm going to update the list with their maturity dates. i'll let you know when i do.

i have these things: maturity date (i'm guessing that's the 2023 dates), the par call date, par call price, original unit/total cost, estimated annual income. let me know which of these to update with besides maturity date.

is it best maybe to continue this on the portfolio thread so it can be together? i'm not sure of the protocol.

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Re: How to Determine Actual Muni Bond Return?

Post by Artsdoctor » Sat Mar 24, 2018 9:07 am

Two things, just in passing.

First, the credit ratings are decent for all of the spot checks which I did.

Second, the bonds were purchased without regard to the state (in other words, you have multiple states represented). This is fine and gives you reasonable diversification. However, you'll need to amortize those premium bonds on your taxes (if you don't, you'll pay too much state tax); I'm sure your accountant is doing this, but just make sure of it.

You should also just verify that the column which is the Cost Basis column is not the purchase price, but the self-amortizing price on the ML website (I presume it's the latter but so verify that it is).

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Sat Mar 24, 2018 1:27 pm

Artsdoctor wrote:
Sat Mar 24, 2018 9:07 am
Two things, just in passing.

First, the credit ratings are decent for all of the spot checks which I did.

Second, the bonds were purchased without regard to the state (in other words, you have multiple states represented). This is fine and gives you reasonable diversification. However, you'll need to amortize those premium bonds on your taxes (if you don't, you'll pay too much state tax); I'm sure your accountant is doing this, but just make sure of it.

You should also just verify that the column which is the Cost Basis column is not the purchase price, but the self-amortizing price on the ML website (I presume it's the latter but so verify that it is).
Whoops, forgot to update that I updated my post with the maturity dates last night.

I'm trying to wrap my brain around what you're asking me to verify. All I know is that I was copying from how it's listed on my monthly statement, and I called it whatever they did. I'll go back over it.

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Sat Mar 24, 2018 3:42 pm

TreadLightly wrote:
Fri Mar 23, 2018 9:28 pm

all bonds were purchased in 2012 and 2013. i'm going to update the list with their maturity dates. i'll let you know when i do.

i have these things: maturity date (i'm guessing that's the 2023 dates), the par call date, par call price, original unit/total cost, estimated annual income. let me know which of these to update with besides maturity date.

is it best maybe to continue this on the portfolio thread so it can be together? i'm not sure of the protocol.
I already looked them all up on EMMA, got maturity date and the other info required calculate yield to maturity, as well as descriptions and ratings. Have this all in a spreadsheet that I can share with you if you're interested. It's a Google Sheets spreadsheet, so I can just provide you with the link, and you'll be able to get at it.

We might as well continue discussing it here, since this thread is focused on just the muni bonds, while the other one is more a big-picture thread. Here are some observations to start with.

The price column is useless, since there's not enough resolution. Price can be calculated by dividing value by quantity and multiplying by 100. For example, price for your first bond is listed as 104, but calculated price is 104.524 (=52,262/50,000*100). You need an accurate price to calculate yield (to maturity), which is one of the most important measures (as it gives you a good approximation of total return if held to maturity).

But also keep in mind that the value listed (and price computed) is unlikely to be what you'd get if you actually sold the bond, for reasons already discussed.

The current yield is not a very useful number (and it can be calculated as coupon * 100 / price). Current yield for premium bonds (priced above par) is always higher than yield to maturity (YTM), and in the case of your bonds much higher. Again, YTM is the most relevant yield in terms of expected return.

Going by the basis and value numbers provided, your total gain is only $5,175, and it's likely that you'd clear less than this due to reasons previously discussed. I believe you are in 15% federal tax bracket, which means you could pay $0 in capital gains taxes (based on what you say these are all long-term gains), leaving only the state income tax to pay (assuming your state doesn't offer preferential taxation for capital gains). So the main consideration in selling would be how much you lose to transaction costs compared to how much more you'd earn in taxable bonds over the remaining term of the bond sold. We can work through an example of this later.

Regarding basis, what Artsdoctor is talking about is that your basis is reduced with each coupon payment, since the premium is amortized over the remaining life of the bond. The premium amortization is deducted from the coupon payment if taxes are paid, and we're assuming that state income tax is paid on out-of-state muni bonds. So you don't pay tax on the full coupon payments, but on the lower amount after subtracting the amortized premiums for the year. Then your basis is reduced by the amount of amortized premium. If your broker is handling this, then you should see lower basis numbers each year (or however often they compute the amortization).

For example, the price of your first bond is calculated as 104.524, your basis price is 103.300 (51,650/50,000*100), and it will mature at 100 in a little less than two years. So each year your basis will be reduced by roughly 1.65 (it's a bit more complicated than this, but it's the concept that matters now).

On EMMA we can look up the coupon rate and maturity date, and with those numbers and the price we can use the spreadsheet YIELD function to calculate the yield to maturity. Actually, the yield would be as of the date you pulled the numbers, and that date would be used as the settlement date. For now I just used today's date, but if you can provide the date you pulled the numbers, we can use that instead.

Using this approach, the weighted average YTM is 2.00%, with yields ranging from 1.51% for the shortest-term bond to 2.77% for the longest term.

Your bond maturities range from 1.86 years to 6.36 years, and the weighted average maturity is 3.84 years. Your bonds are listed in order of increasing maturity. There is one bond that matures 1/1/2023 but has an early redemption at par of 1/1/2022, so this bond is listed in the 1/1/2022 slot. The early redemption date is the one to use in the yield calculation.

In making a hold vs. sell decision, I'd start with the longest-maturity bond, try to figure out a price you could actually sell it for (perhaps ask your broker for a bid if there are no active bids available), and then determine how much you would earn in a taxable bond of similar maturity with the proceeds to how much you'd earn if you held the muni bond to maturity.

The ratings pulled from EMMA show that your bonds are all AA or AAA, so this is a very high quality bond portfolio (there is one non-rated bond, but similar bonds are highly rated). This is higher average quality than the Vanguard muni bond funds, so somewhat lower returns are to be expected compared to the most comparable Vanguard muni bond fund.

The indicated value of the bond portfolio is $404,864, so well below the $550K number you mentioned. I think I saw in the other post that this account includes a couple of funds, but I have not looked at those at all. Annual coupon income is $17,000, but again, the premium amortizations should be subtracted from this for state income tax reporting purposes. Your actual return also will be much lower than this due to the bond prices declining toward 100 at maturity.

To further elaborate on this, your portfolio current yield is the total coupon payments divided by the total value, and is 4.20%. Note that this is more than double the YTM. The YTM factors in the decline of the bond prices toward par (100) at maturity.

I'll leave it here for now, and we can come back to it after you've had a chance to digest this. Let us know what questions you have at that point.

Kevin
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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Sat Mar 24, 2018 4:36 pm

Kevin M wrote:
Sat Mar 24, 2018 3:42 pm
TreadLightly wrote:
Fri Mar 23, 2018 9:28 pm

all bonds were purchased in 2012 and 2013. i'm going to update the list with their maturity dates. i'll let you know when i do.

i have these things: maturity date (i'm guessing that's the 2023 dates), the par call date, par call price, original unit/total cost, estimated annual income. let me know which of these to update with besides maturity date.

is it best maybe to continue this on the portfolio thread so it can be together? i'm not sure of the protocol.
I already looked them all up on EMMA, got maturity date and the other info required calculate yield to maturity, as well as descriptions and ratings. Have this all in a spreadsheet that I can share with you if you're interested. It's a Google Sheets spreadsheet, so I can just provide you with the link, and you'll be able to get at it.

We might as well continue discussing it here, since this thread is focused on just the muni bonds, while the other one is more a big-picture thread. Here are some observations to start with.

The price column is useless, since there's not enough resolution. Price can be calculated by dividing value by quantity and multiplying by 100. For example, price for your first bond is listed as 104, but calculated price is 104.524 (=52,262/50,000*100). You need an accurate price to calculate yield (to maturity), which is one of the most important measures (as it gives you a good approximation of total return if held to maturity).

But also keep in mind that the value listed (and price computed) is unlikely to be what you'd get if you actually sold the bond, for reasons already discussed.

The current yield is not a very useful number (and it can be calculated as coupon * 100 / price). Current yield for premium bonds (priced above par) is always higher than yield to maturity (YTM), and in the case of your bonds much higher. Again, YTM is the most relevant yield in terms of expected return.

Going by the basis and value numbers provided, your total gain is only $5,175, and it's likely that you'd clear less than this due to reasons previously discussed. I believe you are in 15% federal tax bracket, which means you could pay $0 in capital gains taxes (based on what you say these are all long-term gains), leaving only the state income tax to pay (assuming your state doesn't offer preferential taxation for capital gains). So the main consideration in selling would be how much you lose to transaction costs compared to how much more you'd earn in taxable bonds over the remaining term of the bond sold. We can work through an example of this later.

Regarding basis, what Artsdoctor is talking about is that your basis is reduced with each coupon payment, since the premium is amortized over the remaining life of the bond. The premium amortization is deducted from the coupon payment if taxes are paid, and we're assuming that state income tax is paid on out-of-state muni bonds. So you don't pay tax on the full coupon payments, but on the lower amount after subtracting the amortized premiums for the year. Then your basis is reduced by the amount of amortized premium. If your broker is handling this, then you should see lower basis numbers each year (or however often they compute the amortization).

For example, the price of your first bond is calculated as 104.524, your basis price is 103.300 (51,650/50,000*100), and it will mature at 100 in a little less than two years. So each year your basis will be reduced by roughly 1.65 (it's a bit more complicated than this, but it's the concept that matters now).

On EMMA we can look up the coupon rate and maturity date, and with those numbers and the price we can use the spreadsheet YIELD function to calculate the yield to maturity. Actually, the yield would be as of the date you pulled the numbers, and that date would be used as the settlement date. For now I just used today's date, but if you can provide the date you pulled the numbers, we can use that instead.

Using this approach, the weighted average YTM is 2.00%, with yields ranging from 1.51% for the shortest-term bond to 2.77% for the longest term.

Your bond maturities range from 1.86 years to 6.36 years, and the weighted average maturity is 3.84 years. Your bonds are listed in order of increasing maturity. There is one bond that matures 1/1/2023 but has an early redemption at par of 1/1/2022, so this bond is listed in the 1/1/2022 slot. The early redemption date is the one to use in the yield calculation.

In making a hold vs. sell decision, I'd start with the longest-maturity bond, try to figure out a price you could actually sell it for (perhaps ask your broker for a bid if there are no active bids available), and then determine how much you would earn in a taxable bond of similar maturity with the proceeds to how much you'd earn if you held the muni bond to maturity.

The ratings pulled from EMMA show that your bonds are all AA or AAA, so this is a very high quality bond portfolio (there is one non-rated bond, but similar bonds are highly rated). This is higher average quality than the Vanguard muni bond funds, so somewhat lower returns are to be expected compared to the most comparable Vanguard muni bond fund.

The indicated value of the bond portfolio is $404,864, so well below the $550K number you mentioned. I think I saw in the other post that this account includes a couple of funds, but I have not looked at those at all. Annual coupon income is $17,000, but again, the premium amortizations should be subtracted from this for state income tax reporting purposes. Your actual return also will be much lower than this due to the bond prices declining toward 100 at maturity.

To further elaborate on this, your portfolio current yield is the total coupon payments divided by the total value, and is 4.20%. Note that this is more than double the YTM. The YTM factors in the decline of the bond prices toward par (100) at maturity.

I'll leave it here for now, and we can come back to it after you've had a chance to digest this. Let us know what questions you have at that point.

Kevin
goodness gracious. wow. ok i'm going to read this again, once or 5 times. i'll get back :)

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Sat Mar 24, 2018 7:35 pm

Here's a rough analysis of a buy vs. hold decision. I'll use the second bond in your list, CUSIP 943181PZ4, maturing 4/1/2020, which is a term of about two years. I'm using this one because I know you can buy a 2-year CD at a yield of 2.55% at either Fidelity or Vanguard. The CD has essentially no credit risk because it's FDIC insured, while your muni has very low credit risk with an Aa2 rating.

Your yield (to maturity) on this bond is 1.6% (given the reported value), which at your tax rates is a taxable-equivalent yield (TEY) of about 1.9%. In other words, a taxable bond with a yield of 1.9% would provide about the same after-tax return as your muni. To verify, you pay state tax of 4% on the muni, so the after-tax yield is 1.6% * (1-4%) = 1.54%, and you'd pay 19% tax on a taxable bond or CD (15% + 4%), so your after-tax yield would be 1.9% * (1-19%) = 1.54%. This assumes you do not itemize deductions and claim a deduction for state income tax on your federal return; if you do, then the TEY calculation is slightly different.

The CD at 2.55% yields about 0.65 percentage points (65 basis points) more than the TEY of the muni. This is about 1.3 percentage points more than the muni over the two years to maturity. So if your cost to sell the muni is less than 1.3% of the reported value, you come out ahead by selling the muni and buying the CD.

Of course this assumes that the reported value is realistic. If the reported value is not realistic, then it's kind of difficult to do any calculations, since you don't really know the current value, and therefore don't know the actual yield (to maturity). In other words, you don't know how much capital loss to subtract from your coupon payments to figure your total return over the term to maturity.

You could request a bid quote for this muni, which would give you a realistic liquidation value. I'm not sure that any other value makes much sense, since the bid is what you could actually sell it for. We could then recalculate the yield based on the bid quote, and if it results in a TEY of less than 2.55%, then selling the muni to buy the CD would make sense. The bid quote should include any commission, and if it doesn't, we have to subtract the commission in calculating the yield.

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Sun Mar 25, 2018 4:15 pm

Kevin M wrote:
Sat Mar 24, 2018 7:35 pm
Here's a rough analysis of a buy vs. hold decision. I'll use the second bond in your list, CUSIP 943181PZ4, maturing 4/1/2020, which is a term of about two years. I'm using this one because I know you can buy a 2-year CD at a yield of 2.55% at either Fidelity or Vanguard. The CD has essentially no credit risk because it's FDIC insured, while your muni has very low credit risk with an Aa2 rating.

Your yield (to maturity) on this bond is 1.6% (given the reported value), which at your tax rates is a taxable-equivalent yield (TEY) of about 1.9%. In other words, a taxable bond with a yield of 1.9% would provide about the same after-tax return as your muni. To verify, you pay state tax of 4% on the muni, so the after-tax yield is 1.6% * (1-4%) = 1.54%, and you'd pay 19% tax on a taxable bond or CD (15% + 4%), so your after-tax yield would be 1.9% * (1-19%) = 1.54%. This assumes you do not itemize deductions and claim a deduction for state income tax on your federal return; if you do, then the TEY calculation is slightly different.

The CD at 2.55% yields about 0.65 percentage points (65 basis points) more than the TEY of the muni. This is about 1.3 percentage points more than the muni over the two years to maturity. So if your cost to sell the muni is less than 1.3% of the reported value, you come out ahead by selling the muni and buying the CD.

Of course this assumes that the reported value is realistic. If the reported value is not realistic, then it's kind of difficult to do any calculations, since you don't really know the current value, and therefore don't know the actual yield (to maturity). In other words, you don't know how much capital loss to subtract from your coupon payments to figure your total return over the term to maturity.

You could request a bid quote for this muni, which would give you a realistic liquidation value. I'm not sure that any other value makes much sense, since the bid is what you could actually sell it for. We could then recalculate the yield based on the bid quote, and if it results in a TEY of less than 2.55%, then selling the muni to buy the CD would make sense. The bid quote should include any commission, and if it doesn't, we have to subtract the commission in calculating the yield.

Kevin
ok this is helpful in putting it together for me. i'm not at the point that i can do this on my own, but at least something is starting to make sense :)

ok well, after reading up on yield to maturity it's getting less clear. really i swear i'm a functional person but there is some sort of block for this stuff. if the yield to maturity is the "total return anticipated on a bond if the bond is held until it matures," (Investopedia) then why does the current market value matter at all? isn't that irrelevant to the value it holds at maturity, and also to the coupons it's paying? also, if we're not reinvesting the coupons from the bonds back into the same bonds, but instead reinvesting them into something else (which would be our plan going forward), doesn't that defy the assumptions of the equation? how would that change the value of the bond to us?

we do itemize deductions. how does this affect the comparison you outlined?

so with this bid quote and commission, we do not have an agreement to pay commission on any sales, but are you referring to something built into the transaction process that we don't have to be previously aware of?

thank you so much for helping with this. i really want to be able to evaluate these without you having to pain through each one for me, but the learning process is slow! should i ask for a bid quote for all of them or just this one?

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Mon Mar 26, 2018 5:47 pm

TreadLightly wrote:
Sun Mar 25, 2018 4:15 pm
ok this is helpful in putting it together for me. i'm not at the point that i can do this on my own, but at least something is starting to make sense :)
One thing you could do is just do a small experiment by selling a relatively small quantity of one of your bonds. You might get a lower price for a smaller quantity, but I've often seen the best prices on small quantities when buying in recent months. For example, you could sell five of one of your bonds ($5,000 face value), and see what price you get compared to the most recent price shown on your report (or online, if you have online access).
ok well, after reading up on yield to maturity it's getting less clear. really i swear i'm a functional person but there is some sort of block for this stuff. if the yield to maturity is the "total return anticipated on a bond if the bond is held until it matures," (Investopedia) then why does the current market value matter at all? isn't that irrelevant to the value it holds at maturity, and also to the coupons it's paying?

Total return consists of two components: income return and capital return. For a bond, the income return is the coupon payments. The capital return is calculated from the change in value over the time period you're measuring. So all of these, current value, value at maturity, and coupon payments go into calculating yield to maturity.

Let's look at an example using one of your bonds, but simplify it a bit to make it easier to understand. Take the 2-year bond with coupon of 4% and price of 104.xxx, and let's assume that one year from now the price is 102 (we know the bond will mature at 100, so we know that the price will decline from 104.xxx to 100 over the next two years). So now we're considering a 1-year bond with coupon of 4% and price of 102.

If you consider only the coupon income, you'd think your return would be 4% ($4 for every $100 of bond value for one year is 4%). But that's not your total return, since the value of your bond declines from 102 to 100, which is a capital return of roughly -2%. So your total return is roughly the income return of 4% combined with the capital return of about -2% for a total return of 2%.

If you calculate the yield to maturity (YTM, or just yield) of a 1-year bond priced at 102 with a 4% coupon, and assume a single coupon payment (most bonds pay interest semi-annually, but this only makes a small difference in the yield), you'll find that it's 1.96%, so very close to our rough estimate of 2% total return for the year.

Does that help you understand why the current market value matters in the calculation of yield to maturity and total return? If you ignore current market value then you're ignoring the capital return component of total return, and in this case, vastly overestimating your yield and total return.
also, if we're not reinvesting the coupons from the bonds back into the same bonds, but instead reinvesting them into something else (which would be our plan going forward), doesn't that defy the assumptions of the equation? how would that change the value of the bond to us?
It's true that yield to maturity is only an approximation of expected total return, and that total return will end up equaling the starting yield to maturity if coupon payments are reinvested at the starting yield to maturity. This uncertainty is referred to as reinvestment risk. However, the difference this makes is fairly small, especially when yields are low and time periods are short.

As an example, consider a 2-year bond with yield of 2%, and for simplicity assume annual coupon payments. If just took the coupon payment at one year and didn't invest it in anything, you'd just earn the $4 in coupon payments for every $100 of bond value ($2 at year one and $2 at maturity). If you invested the one-year coupon at 2% you'd earn an extra $0.04, for a total of $4.04 for every $100 of bond value. So the "interest on interest" is a fairly small component when yields are small and time periods are short. Of course it makes a more significant difference with higher yields and longer time periods.
we do itemize deductions. how does this affect the comparison you outlined?
Will you be itemizing in 2018? Most people won't be with the higher standard deduction, and in your tax brackets I suspect you wont' be. I'm running short on time now, so I can come back to this later if you do. The difference isn't very big, especially since your state tax rate is pretty low.
so with this bid quote and commission, we do not have an agreement to pay commission on any sales, but are you referring to something built into the transaction process that we don't have to be previously aware of?
If you're not paying an explicit commission, then chances are that ML is marking up the price when you buy and marking it down when you sell; i.e., the bid/ask spread presented to you by ML is larger than on whatever exchange they are using to buy and sell bonds. This is why I'm encouraging experimenting somehow to find out how ML's bid/ask prices compare to what I see at Fidelity or Vanguard.
thank you so much for helping with this. i really want to be able to evaluate these without you having to pain through each one for me, but the learning process is slow! should i ask for a bid quote for all of them or just this one?
It would be ideal if you could request a bid quote for a bond for which there are active bids visible elsewhere, but this might be difficult. If you could get a bid quote for at least one bond, at least that will give us an indication of how realistic the values/prices ML is showing you are. And we could use that as an example to go through the comparison of what'd you'd earn after taxes if you hold the bond to what you could earn if you sold it and bought a higher-yielding taxable bond or CD.

Kevin
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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Mon Mar 26, 2018 11:42 pm

Kevin M wrote:
Mon Mar 26, 2018 5:47 pm
One thing you could do is just do a small experiment by selling a relatively small quantity of one of your bonds. You might get a lower price for a smaller quantity, but I've often seen the best prices on small quantities when buying in recent months. For example, you could sell five of one of your bonds ($5,000 face value), and see what price you get compared to the most recent price shown on your report (or online, if you have online access).


I asked for a quote for the bond you evaluated, or a similar maturity one we have if he couldn't get it for that one.

Total return consists of two components: income return and capital return. For a bond, the income return is the coupon payments. The capital return is calculated from the change in value over the time period you're measuring. So all of these, current value, value at maturity, and coupon payments go into calculating yield to maturity.

Let's look at an example using one of your bonds, but simplify it a bit to make it easier to understand. Take the 2-year bond with coupon of 4% and price of 104.xxx, and let's assume that one year from now the price is 102 (we know the bond will mature at 100, so we know that the price will decline from 104.xxx to 100 over the next two years). So now we're considering a 1-year bond with coupon of 4% and price of 102.

If you consider only the coupon income, you'd think your return would be 4% ($4 for every $100 of bond value for one year is 4%). But that's not your total return, since the value of your bond declines from 102 to 100, which is a capital return of roughly -2%. So your total return is roughly the income return of 4% combined with the capital return of about -2% for a total return of 2%.

If you calculate the yield to maturity (YTM, or just yield) of a 1-year bond priced at 102 with a 4% coupon, and assume a single coupon payment (most bonds pay interest semi-annually, but this only makes a small difference in the yield), you'll find that it's 1.96%, so very close to our rough estimate of 2% total return for the year.

Does that help you understand why the current market value matters in the calculation of yield to maturity and total return? If you ignore current market value then you're ignoring the capital return component of total return, and in this case, vastly overestimating your yield and total return.


Beautiful! Tomorrow I'll see if I can do some on my own.
Will you be itemizing in 2018? Most people won't be with the higher standard deduction, and in your tax brackets I suspect you wont' be. I'm running short on time now, so I can come back to this later if you do. The difference isn't very big, especially since your state tax rate is pretty low.


I forgot about that. I'll have to figure that out.
If you're not paying an explicit commission, then chances are that ML is marking up the price when you buy and marking it down when you sell; i.e., the bid/ask spread presented to you by ML is larger than on whatever exchange they are using to buy and sell bonds. This is why I'm encouraging experimenting somehow to find out how ML's bid/ask prices compare to what I see at Fidelity or Vanguard.


Is this considered underhanded, or is it just like a store marking up a product? He's gone to great lengths to express his fee transparency, so it feels weird, but in all fairness he's bought no bonds since we've owned the account. Is this markup just for bonds or is it done for equities too, as a way to get a commission without revealing it?

It would be ideal if you could request a bid quote for a bond for which there are active bids visible elsewhere, but this might be difficult. If you could get a bid quote for at least one bond, at least that will give us an indication of how realistic the values/prices ML is showing you are. And we could use that as an example to go through the comparison of what'd you'd earn after taxes if you hold the bond to what you could earn if you sold it and bought a higher-yielding taxable bond or CD.

Kevin
I've emailed to request a quote as mentioned above. I also asked about transaction fees on our high ER equities. I expect a nervous phone call tomorrow.

Thanks for breaking it down. I'm struggling to understand why we buy bonds, or bond funds specifically since I'm looking at selling these and building a new portfolio. Alot of the Vanguard bond index funds have a return less than the 2 yr CD you mentioned. So why buy bond funds at all?

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Re: How to Determine Actual Muni Bond Return?

Post by Artsdoctor » Tue Mar 27, 2018 7:33 pm

Tread,

You'll have to figure where your priorities are because there are some points which may be important and some not.

First, think about individual bond traders this way, especially when it comes to munis. There are investors and there are dealers. There are experienced investors and there are inexperienced investors. There are big investors and there are little investors. Although you can always be in the right place at the right time, the best prices will go to the large, experienced investors (actually, the best prices will probably go to the dealers). Typical trades average in the $25,000 to $50,000 range, just like what you have (the "small investor"). There are brokers who trade in millions, just for perspective.

Second, there is a big difference between buying and selling individual muni bonds. While there are always exceptions, it's best to think about it this way: buying will nearly always be "easier" than selling. You're picking from an array of offerings when you're buying; when you're selling, it's you who will be trying to find a buyer. This usually translates to the concept of "buying and holding until maturity," and this is exactly what the vast majority of individual investors do. It's too "expensive" to sell your individuals munis so most small, individual investors don't do this (large brokerage houses and dealers certainly are in the business to do this).

Third, you have to understand how your ML broker stays in business. The broker makes money off of you. There is no such thing as "no fee investing" with ML so it's just a matter of you finding out how they're making their money. They can certainly charge you a flat fee for a trade (for example, $1 per bond). That's going to be obvious. But more importantly, they're going to make their money based on the price you're going to get for your bonds. You may be offered $111, that bond makes its way through the dealers, and then is re-sold for $113. What's a fair price? Good question. If you plug some of your bonds into the EMMA website, you'll find that the last time some of those bonds were traded was last year. You, as the investor, will not know what a fair price is when you're trying to trade it, even if it was traded yesterday (and I doubt you'll do the homework on that). You can track what happens to that bond you sold by following it, but your transaction has already occurred.

Roughly speaking, you're probably going to lose 2% in your sale if you want a very rough estimate. It could be more or it could be less. I suspect that your broker knows you're a novice and will come up with a sales price which will be low; THIS is how he will make money.

But finally, you'll have to figure out what matters to you. Let's say you sell those bonds for 2% less than a more experienced investor would sell for. Is that important to you? Or do you just want to unload the bonds? If the muni bond portfolio is worth $500,000, for example, and you give up $10,000 just because of you're a small, inexperienced investor--it may be worth it to you. Although don't think you won't pay something for those transactions.

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Thu Mar 29, 2018 8:34 pm

Artsdoctor wrote:
Tue Mar 27, 2018 7:33 pm
Third, you have to understand how your ML broker stays in business. The broker makes money off of you. There is no such thing as "no fee investing" with ML so it's just a matter of you finding out how they're making their money. They can certainly charge you a flat fee for a trade (for example, $1 per bond). That's going to be obvious. But more importantly, they're going to make their money based on the price you're going to get for your bonds. You may be offered $111, that bond makes its way through the dealers, and then is re-sold for $113. What's a fair price? Good question. If you plug some of your bonds into the EMMA website, you'll find that the last time some of those bonds were traded was last year. You, as the investor, will not know what a fair price is when you're trying to trade it, even if it was traded yesterday (and I doubt you'll do the homework on that). You can track what happens to that bond you sold by following it, but your transaction has already occurred.

Roughly speaking, you're probably going to lose 2% in your sale if you want a very rough estimate. It could be more or it could be less. I suspect that your broker knows you're a novice and will come up with a sales price which will be low; THIS is how he will make money.

But finally, you'll have to figure out what matters to you. Let's say you sell those bonds for 2% less than a more experienced investor would sell for. Is that important to you? Or do you just want to unload the bonds? If the muni bond portfolio is worth $500,000, for example, and you give up $10,000 just because of you're a small, inexperienced investor--it may be worth it to you. Although don't think you won't pay something for those transactions.
well i'd say $10,000 is pretty significant. what can i do? i'm waiting on him to give me a quote and he hasn't after i've asked twice. he will ultimately, but it's not been as easy process already. Vanguard said if we buy $500,000 in Vanguard products first, I'll pay $1 for every $1000 in bonds for the sale (which alone is not terrible). the Vanguard bond desk also said that once i get a quote from my advisor, they will give me a quote on the same bond. then i'll choose.

but like you said, if it hasn't sold recently, it'll be hard to tell market value, right? should i just opt not to sell if i don't get a price that makes it worthwhile to switch, trying to use Kevin's logic to evaluate each offered price?

second topic: my question about why buy bond funds at all was not suggesting that i want to buy more bonds. no, i'm done with this complicated individual bond mess! i just have trouble understanding bond fund yield. it seems so low, and i don't understand why we should buy them at all. after watching the 10 investment videos on the Boglehead Wiki, the average bond return is listed as 5.4% or something. i was so excited for this and all ready to buy bond funds. but when i get on Vanguard I see bond index funds in the 1%s, the 2%s, and i just don't get why even bother? where are those higher average bond returns coming from?

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Thu Mar 29, 2018 9:04 pm

TreadLightly wrote:
Mon Mar 26, 2018 11:42 pm
Kevin M wrote:
Mon Mar 26, 2018 5:47 pm
One thing you could do is just do a small experiment by selling a relatively small quantity of one of your bonds. You might get a lower price for a smaller quantity, but I've often seen the best prices on small quantities when buying in recent months. For example, you could sell five of one of your bonds ($5,000 face value), and see what price you get compared to the most recent price shown on your report (or online, if you have online access).

I asked for a quote for the bond you evaluated, or a similar maturity one we have if he couldn't get it for that one.
So, did you get a bid quote? I think you should always be able to get a bid quote for any bond you own. There would be no point in getting a quote for a similar bond, since what you want to know is how much you could get for your bond. That's the only price that matters, since that's the relevant price in comparing your return in holding the muni compared to return by selling it and buying a taxable fixed-income security.
If you're not paying an explicit commission, then chances are that ML is marking up the price when you buy and marking it down when you sell; i.e., the bid/ask spread presented to you by ML is larger than on whatever exchange they are using to buy and sell bonds. This is why I'm encouraging experimenting somehow to find out how ML's bid/ask prices compare to what I see at Fidelity or Vanguard.

Is this considered underhanded, or is it just like a store marking up a product? He's gone to great lengths to express his fee transparency, so it feels weird, but in all fairness he's bought no bonds since we've owned the account. Is this markup just for bonds or is it done for equities too, as a way to get a commission without revealing it?
There's always a dealer in the middle, so there's always a bid/ask spread on the secondary market. This is true for any security traded on a secondary market; there has to be something in it for the dealers to make the market.

Your broker may charge a commission, as Fidelity and Vanguard do, or they may add something to price they sell it to you for and subtract something from the price they buy it from you for. They're going to make money on it somehow. You can ask your broker how this works at ML.

Thanks for breaking it down. I'm struggling to understand why we buy bonds, or bond funds specifically since I'm looking at selling these and building a new portfolio. Alot of the Vanguard bond index funds have a return less than the 2 yr CD you mentioned. So why buy bond funds at all?
I assume you're looking at SEC yield, which is the most common yield used to compare bond funds. It's average yield to maturity over a recent 30-day period, so kind of like the yield we're discussing, but not exactly.

"Return" over some past period is not comparable to yield, as it reflects a past capital return component, which may have nothing to do with the future capital return component. Also, a bond fund is more like a rolling bond ladder than a single bond, so you can't really compare them directly.

At any rate, the SEC yield of a bond fund will reflect its term risk and credit risk. The higher the risk, the higher the yield. Also, we obviously can't compare taxable and tax-exempt yields directly.

But yeah, if you look at a short-term bond fund with no credit risk, the Vanguard Short-term Treasury (Admiral shares) funds have SEC yields of 1.91% and 2.22%, which is less than the 2.60% you can get with a 2-year CD. These funds have average maturites of 1.9 and 2.0 years, so comparable to the CD, but the maturity of the CD will gradually decline while the average maturity of the fund will remain approximately constant--again, more like a rolling bond ladder than a single bond.

I think it's better the compare the 2-year CD at 2.60% to the 2-year Treasury at about 2.3%, as it's more apples to apples. You get about 30 basis points of extra yield with the CD in return for more liquidity risk, and liquidity risk doesn't matter if you know you will hold to maturity.

Most people here prefer bond funds because they're simpler, they're highly liquid, and for anything other than Treasuries they provide diversification that may be difficult or impossible for a retail investor to get with individual bonds. I happen to think that CDs often are a better deal on a risk-adjusted basis, so most of my fixed income is in CDs, but I still own some bond funds (and of course some in individual Treasuries and munis).

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Thu Mar 29, 2018 9:22 pm

TreadLightly wrote:
Thu Mar 29, 2018 8:34 pm
Vanguard said if we buy $500,000 in Vanguard products first, I'll pay $1 for every $1000 in bonds for the sale (which alone is not terrible). the Vanguard bond desk also said that once i get a quote from my advisor, they will give me a quote on the same bond. then i'll choose.
I think I already mentioned this, but Fidelity charges $1 per bond ($1,000 face value) regardless of account size, so Fidelity is better for individual bonds for smaller accounts. I've also found that Fidelity has had slightly better pricing on the munis I bought in recent months (I have accounts at both).

Once you have an account, you can request a quote at Fidelity online--you don't even have to talk to anyone. But I'm sure Fidelity would give you a quote like Vanguard offered to do.

Here's something you could do. Open an account at Fidelity, and then transfer in kind a portion of your bonds. Then use the online functionality to request a bid quote, and compare to what you get from ML. I'd say the fact that your broker hasn't even gotten back to you with a quote is reason enough to move your assets.
but like you said, if it hasn't sold recently, it'll be hard to tell market value, right? should i just opt not to sell if i don't get a price that makes it worthwhile to switch, trying to use Kevin's logic to evaluate each offered price?
The quote you get is the market value as far as you're concerned. However, EMMA has a price discovery tool that you can use to see recent trades on similar bonds. And with an account at Fidelity (or Vanguard), you can easily search for bonds that are almost identical to the ones you own, and see the trade activity for them (I did this for one of your bonds).
after watching the 10 investment videos on the Boglehead Wiki, the average bond return is listed as 5.4% or something. i was so excited for this and all ready to buy bond funds. but when i get on Vanguard I see bond index funds in the 1%s, the 2%s, and i just don't get why even bother? where are those higher average bond returns coming from?
Ancient history? Returns haven't been anywhere near 5% for bond funds in recent years. Just look here: https://investor.vanguard.com/mutual-fu ... nd-returns.

For bonds the yield to maturity (or SEC yield for bond funds) is much more relevant to expected returns than are past returns . If you look at the SEC yields of the funds at the beginning of the 5-year or 10-year periods when they returned 5%, they were probably in the 5% ballpark. Now they're in the 2-3% ballpark. Again, the SEC yield will be higher for higher-risk funds.

Although Fidelity is better for individual bonds and secondary-market CDs for smaller accounts, Vanguard generally is better for bond funds, as they have a broader range of very low-cost funds. Fidelity competes only on a small number of its bond funds, and for all others generally has higher expense ratios.

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Re: How to Determine Actual Muni Bond Return?

Post by TreadLightly » Thu Mar 29, 2018 9:52 pm

Kevin M wrote:
Thu Mar 29, 2018 9:22 pm
I think I already mentioned this, but Fidelity charges $1 per bond ($1,000 face value) regardless of account size, so Fidelity is better for individual bonds for smaller accounts. I've also found that Fidelity has had slightly better pricing on the munis I bought in recent months (I have accounts at both).

Once you have an account, you can request a quote at Fidelity online--you don't even have to talk to anyone. But I'm sure Fidelity would give you a quote like Vanguard offered to do.

Here's something you could do. Open an account at Fidelity, and then transfer in kind a portion of your bonds. Then use the online functionality to request a bid quote, and compare to what you get from ML. I'd say the fact that your broker hasn't even gotten back to you with a quote is reason enough to move your assets.
he fell all over himself the day after my email calling and emailing us, but won't address the bonds. he considers himself "a muni bond guy," so i don't get it.

i'll definitely at least get quotes from fidelity also. with 3 options i'll feel better about the choices i'm given. then i'll just need to decide if it's worth it to see based on the quote. i'll go ahead and open both new accounts now before waiting longer for answers from ML.
Ancient history? Returns haven't been anywhere near 5% for bond funds in recent years. Just look here: https://investor.vanguard.com/mutual-fu ... nd-returns.

For bonds the yield to maturity (or SEC yield for bond funds) is much more relevant to expected returns than are past returns . If you look at the SEC yields of the funds at the beginning of the 5-year or 10-year periods when they returned 5%, they were probably in the 5% ballpark. Now they're in the 2-3% ballpark. Again, the SEC yield will be higher for higher-risk funds.

Although Fidelity is better for individual bonds and secondary-market CDs for smaller accounts, Vanguard generally is better for bond funds, as they have a broader range of very low-cost funds. Fidelity competes only on a small number of its bond funds, and for all others generally has higher expense ratios.

Kevin
ok i feel a little less confused. i could not understand why bonds were returning so high on average, yet i couldn't get a yield even close. i'm going to be studying up on yield vs return though, because i think i need to know more there.

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Re: How to Determine Actual Muni Bond Return?

Post by Kevin M » Fri Mar 30, 2018 1:41 pm

TreadLightly wrote:
Thu Mar 29, 2018 9:52 pm
he fell all over himself the day after my email calling and emailing us, but won't address the bonds. he considers himself "a muni bond guy," so i don't get it.
Like I said, if you can't even get a quote from him, that is reason enough to move at least the bond portfolio. You can do a transfer in kind of only selected assets in an account. So you might want to move the bonds to Fidelity, and continue to work on what to do with the other assets in the account. Fidelity will help you fill out the necessary form to do the transfer, although you probably can do it online without human involvement if you know how to do it.

The only cost to do this will be whatever transfer fee ML might charge, which you can find out in advance. Once transferred, your annual holding cost is $0, so since the transfer fee is likely small, you'll make it back quickly due to no management fees going forward.
i'll definitely at least get quotes from fidelity also. with 3 options i'll feel better about the choices i'm given. then i'll just need to decide if it's worth it to see based on the quote. i'll go ahead and open both new accounts now before waiting longer for answers from ML.
Sounds good. Just be sure that you're clear on whether or not the quotes include the commissions, and whether Vanguard is quoting based on $1 or $2 commission per bond. Unless you're actually ready to move $500,000 into Vanguard assets (which does not include individual bonds, CDs, stocks, or non-Vanguard funds), then Fidelity probably is the better place to move the bonds to. You can always transfer assets from Fidelity to Vanguard later, say if you decide to go with bond funds instead of individual bonds.
ok i feel a little less confused. i could not understand why bonds were returning so high on average, yet i couldn't get a yield even close. i'm going to be studying up on yield vs return though, because i think i need to know more there.
I don't know what figure you're getting for "bonds were returning so high on average", but like I said, it clearly is a past period when yields were higher. It very will could be a very long-term average, like over 90 or 100 years, or even longer. These returns are meaningless with respect to current expected returns for bonds.

It's really not that complicated, and the videos you mention do a decent job of explaining it all. I just scanned the transcripts for a couple of the bond videos, and they do about as good a job of explaining bonds as other references. There are the ones I scanned:
Why bother with bonds?
Learn Bond Basics in Minutes

Nowhere did I see mention of 5% returns, so maybe that's in another one of the bond videos. Give me a link to it and I can further clarify.

Consider this simple example. Five-year Treasury yield was about 16% in August 1981, so if you bought this bond and held it to maturity, you would have earned about 16%, with some difference due to the rate you earned on the reinvested coupon payments. If you bought the bond at par (price=100), the coupon rate would have been about 16%, and this is where most of your return would have come from. If you buy a 5-year Treasury today, the yield is about 2.6%, so if you buy that bond and hold it to maturity, you'll earn about 2.6%, again, with some variation due to reinvestment rates.

So it's the initial yield of the bond that is the main factor in determining return if held to maturity, and past returns when initial yields were higher have nothing to do with more recent returns and returns going forward when yields have been and are much lower. We have been in a period of historically low yields for some years, which is why more recent bond returns are much lower.

Bond funds typically don't hold bonds to maturity, the values of the bonds in the fund change as yields change, and the fund is constantly rolling shorter-term bonds into longer-term bonds to keep the average maturity and duration in line with the fund's objectives. These factors cause the bond fund return to vary somewhat from the initial yield over any particular period. The same is true for a rolling bond ladder.

All of this is explained in the referenced video transcripts.

Kevin
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