Investing in the Secondary Market

If you are trying to pick up high yield municipal bonds in the secondary market, the first principle is caveat emptor (Latin for “let the buyer beware”). The first step is to figure out what sectors in the high yield marketplace may be of interest to you. For example, you may be interested in airline, tobacco, or certain other industrial corporate type of issuers. In thinking about these sectors, you may want to compare them to somewhat similar corporate credits and see if the yield makes sense. For example, if you are contemplating buying an airline-backed bond and the ultimate security comes from the airline itself, you may want to check current yield levels on the airline’s corporate debentures, which are more readily disclosed on many financial web sites. While this isn’t a foolproof method by any means, it can give you a rough idea of what a municipal equivalent might be worth, after adjusting for differences in tax treatment and in bond structure (e.g., maturity, since corporate debentures tend to be shorter in maturity than municipals). If the municipal bond is being offered at a yield that is, say, 500 basis points (5 percent) lower than the corporate debenture current yield level, you should pause to question whether the offering is an attractive one. Once an offering passes this basic test, you can delve deeper into the credit. A good source of information is a web site run by the Municipal Securities Rulemaking Board, the Electronic ...

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