What determines the yield of my Municipal Bond Fund?

I currently have a Municipal Bond Fund which is tax deferred. The yield is OK, and in the past it has been amazing. CD rates look very interesting now at 5.00% and up. I live in New York and I understand that taxes have to be paid on CDs. So I'm trying to determine whether 4.20% tax deferred or a 5.20% CD after taxes will give me the maximum amount of money. I am in the lowest tax bracket. I would also like to know what dictates the yield of the Municipal Bond Fund, if the stock market is doing well does that generally mean the yield of the bond fund will drop?

Bryan gave you a good but not complete answer. He neglected one aspect of the determination of the yield on the fund. That is the expenses of the fund. Normally, they run about 1.5% annually, but some funds are higher and some are lower. Those expense impact your yield.

I am a little puzzled by your comment of the fund being tax deferred. Muniple bonds are not taxed at all by the federal government and neither by the state government to the extent that they contain bonds from the state of New York.

Here's a link that shows how to calculate the tax equivalent return

http://allthingsfinancialblog.com/2006/1...

The bond market is tied to the stock market but usually moves in opposite directions. The bond prices are directly effected by the current fed funds rate that the federal reserve determines. The yield is calculated by taking the annual interest from the bond and dividing it by the current price. When a bond first come on the market the yield and the interest rate will be the same but as time goes on the price of the bond will move to reflect what current bonds are paying.

Do you live in New York City? Because if you do, then NY munis are triple tax-free.

To figure your taxable equivalent yield, add up your marginal income tax rates, subtract that from .100 and then divide the result into the tax free yield. It's easier than it sounds.

15% Fed. + 5% state = 20% (.20)

.100 - .20 = .80

4.2 / .80 = 5.25% In this case, the tax free yield beats the taxable yield of 5%.

Something else to consider, if you sell your muni bond fund, you may pay a capital gain on the shares themselves.

Also, I would argue that the yield on intermediate and longer term bond funds have little to do with what the Federal Reserve is doing. It may have some influence, but it isn't going to move yields as much as the big bond killer - INFLATION!! Economic news has a very dramatic effect on bond yields.

So does the credit quality of the underlying bonds. Oppenheimer's Rochester Muni Fund has a yield of 5.05%, but it also has unrated bonds, AMT bonds (bonds subject to Alternative Minimum Tax, whose interest is not necessarily tax free and therefore, have a higher yield), lower rated bonds and may also use leverage (i.e. borrow money using the fund's assets as collateral to buy more bonds).

Stocks and bonds do not always move in opposite directions, this is a common misunderstanding. In fact, many times they move together (like in a bad economy when people go to cash).

Munis are different market altogether, and like all bonds, trade off of a spread relative to Treasuries, based on their maturity and credit quality. Muni yields have not really gone up when compared to Treasuries, because investors typically buy them and hold them. There is a lot of demand for NY paper, which also keeps prices low.

Not all bonds are issued at par! I've seen plenty of discount bonds (OID) come to market, as well as premium bonds. It all depends on the issue and the market.

Lastly, that 5% CD may be a teaser rate, or may require that you put a bunch of money in a no or low interest checking account. When the term comes up, what will you be able to reinvest in?

I think I might stay in the muni fund if it were me.

Hello,

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