Investors buy municipal bonds because they are a low-risk, income producing security. In addition, many municipal bonds are exempt from federal and/or state income taxes. Sometimes called "munis," municipal bonds are fixed-rate debt securities issued by local and state governments that need to borrow money. Municipal bonds are traded on financial markets and the actual price is rarely the same as the face value. As an investor, you'll want to know how to calculate the cost basis of municipal bonds, the figure you use when computing the gain or loss on your investment.
Things You'll Need
- Transaction records
Realize that the cost of a municipal bond isn't limited to the purchase price. Cost basis is an accounting term that refers to the total cost of an investment, including all fees and commissions. Investors use the cost basis of municipal bonds, along with the total proceeds from their investment, to determine total gain or loss.
Consult the record of your purchase of a municipal bond. Add broker's commission and any other purchase costs to the price (not the face value) of the bond.
Add all sales costs to the total from Step 2 to find the cost basis. For example, if you purchased a $5000 face value municipal bond for $4500 and paid transaction costs of $100 for buying and selling the bond, the cost basis is $4600.
Calculate your percentage gain using cost basis. Subtract the cost basis from your total proceeds, which is the combined total of all income received plus the sale price, to find your gain. If the cost basis is greater than total proceeds, you have a loss. Then, divide by the cost basis (multiply by 100) to find the percentage gain. For example, if the bond in Step 3 earned $1000 interest and sold for $4800 total proceeds are $5800. You have ($5800 - $4600) = $1200. Divide $1200 by $4600 and multiply by $100 to find the percentage gain of 26.1 percent.
Tips & Warnings
- The main factors that influence municipal bond prices are prevailing interest rates and the credit rating of the issuing government. If you hold a municipal bond until maturity, it will be redeemed at face value, regardless of any price fluctuations since it was first issued. For tax purposes, municipal bond income (tax-exempt or not) is considered income. Profit derived from the prices at which the bond is bought and sold may be treated as capital gains.
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