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Step 1
Calculate bond yields with the use of a bond calculator. A suggested calculator may be found in the Resources section. Enter the coupon, maturity and call feature to calculate yield to maturity and yield to call.
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Step 2
Calculate and choose the higher-yielding (lower-priced) value between the call and maturity value. This is the yield and price at which the bond should trade. It would be illegal to use the higher-priced security.
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Step 3
Calculate current yield by dividing the coupon by the price of the bond. If the bond is at a discount from par, the yield will be higher than the current yield. A premium or price above par creates a higher current yield than the yield to maturity.
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Step 4
Calculate total return by adding the coupon and the change in price over the past year. Divide the sum by the price a year ago. Municipal bonds priced at 85 a year ago and worth 100 (or par) today with a 5 percent coupon have appreciated (15 + 5) or 20 points. The total return is 20/85 or 23.8 percent.
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Step 5
Compute the advantage of municipal bond yields with taxable yields by multiplying the taxable rate by (1 -- your tax rate). Presume the taxable bond is 8 percent and the municipal rate is 7 percent. If your tax rate is 25 percent, then the rate at which a municipal bond is equivalent to a taxable bond is 8 x (1 -- .25) or (8 x .75) or 6 percent. Choose the municipal bond and gain 1 percent or 12.5 percent more yield.
