Do You Take a Loss If You Sell Municipal Bonds After One Year?
Municipal bonds bonds are issued by state and local governments. Muni bonds are appealing to investors because the interest they pay is exempt from federal income tax and possibly state income tax. Municipal bonds are marketable securities with current values based on a bond's interest rate and the credit quality of the bond issuer.
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Interest Rates
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The primary force that changes bond values -- including those of municipal bonds -- is interest rates. Bonds pay a fixed rate of interest. To adjust for changing market rates, the price of a bond will move up or down. Rising rates will cause bond prices to decline and falling interest rates will result in higher bond prices. If interest rates have declined since you purchased your municipal bond, it is possible you may even make money on the sale of the bond.
Researching Rates
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You can get an indication of the changes in the last year for municipal bond interest rates by looking at the Bond Buyers 20 Bond Index. The index is used as an indicator for current municipal bond rates. In November 2010, the index was at 4.24 percent. A year earlier it was at 4.40 percent. Overall, municipal bond rates had fallen slightly, meaning you had a good change of selling your bond without a loss. The Bond Buyer 20 Bond Index is reported on Bankrate.com.
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Dealers and Brokers
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The municipal bond market does not have a centralized exchange for buying and selling. Bond dealers purchase and sell municipal bonds for their clients and their own accounts. Some dealers will make a market in certain municipal bonds, which will result in better pricing for the dealer's customers. Your bond broker earned his commission by marking up the price he received from the bond desk in his firm. When you sell your bond, he will give you a price slightly less than the bond desk will bid for it. How much of a haircut you take in the buying and selling of your bond is dependent on whether the dealer makes a market in that bond, the size of the bond and your relationship with your broker.
Getting a Price
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If you do a lot of bond business with your broker, he should give you a good price for the bond you are selling, based on market conditions. If the bond was a one-time purchase, a little market research will help you get a better price. Call another broker and ask if you can buy a bond like the one you want to sell and what the current price and yield would be. Then ask your broker for a bid on the bond you want to sell and use your research information to negotiate a better price.
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