I would appreciate recommendations for web sites or books with explanations on how to select individual municipal bonds for puchase. Most of my funds are with Vanguard. They offer a variety of state tax-free funds, but none for my state (NC). They do offer the ability to buy individual bonds through their brokerage arm.I have a decent understanding of how bonds work (interest rates up, bonds down), but am not sure how to select an individual bond to purchase. I did a search of NC bonds at the Vanguard Order Desk and see terms that I'm not familiar with, such as "callable 07/10@100 - Extraordinary Calls" and "Sinking Fund 07/20@100". I understand what it means for a bond to be callable, but not the figures or what an Extraordinary call is. Since these are bonds on the secondary market, it is not as easy to sell them as with mutual funds. Is there a source that gives an indication of how often/likely a bond is to be called? That way, I could purchase a 30-year bond, with the hope that it would be called in 5 years (if I was looking for a 5 year investment).Thanks.

"don" wroteI have one callable CD (whose adjustable rate also happens to rise every 12 months, per a pre-set sequence), maturing in three years (the original term was 5.5 years). In hindsight, I regret purchasing it a bit. With more study (or someone flat-out pointed it out to me), I figured all the important flexibility belongs to the issuer. If rates rise, it's sitting pretty, because the rate on my CD is likely lower than contemporary rates. If rates drop, it can (and I think will), call the CD. The last six months of this CD will pay 6%. The one advantage of the CD so far is that it paid better than money market rates for the first year or so. Now it's paying 4.25%, which is less than what my Fidelity money market account pays, but still not awful. This of course is using some hindsight, so my regret at this purchase is far from total. But, being a little wiser now, it's far less likely I will buy callable bonds or CDs in the future.OTOH, for people who are a lot older than I (who...

How to select individual bonds for purchase?

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Paul Michael Brown 19 years ago

Tad Borek:

PIMCO Bond God Bill Gross was recently quoted in Barrons as saying he invests in closed end municipal bond funds. While I'm sure his portfolio also includes individual bonds, I think it's significant that even somebody as sophisticated as Bill Gross sees the value in buying munis via a fund.

That's some bid/ask spread! In today's low-rate environment, that's just a killer.

Meanwhile, last time I checked, Vanguard's Long Term Munibond fund (VWLTX) charged about 16 basis points (0.16 percent) annually.

Excellent point. And I'll add that if you're giving away three to five percent in transaction costs to own individual bonds, you can easily accept the fluctuating net asset value that comes with investing via a fund. Unless some emergency causes you to sell after a sharp backup in rates, the risk to your principal is very manageable. Which, to my mind, eliminates the last reason to hold individual bonds.

If you're in a high-tax state, you can find state-specific closed end munibond funds by searching at

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Granted, the fees on those funds are higher. Any many are leveraged -- which is not for everybody. But for high bracket investors the CEFs are a good option in taxable accounts.

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beliavsky 19 years ago

Your paragraph above implies that there is more price risk in a bond fund than in an individual bond of the same duration, which is incorrect. The NAV volatility of a bond fund will generally be LOWER than the price volatility of a bond, since a fund is more diversified.

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Elle 19 years ago

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I spoke only to "callability" in general. I have no particular position on individual munis at this time, so your post seems misplaced.

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How to select individual bonds for purchase?

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