The True Price of Your Muni Portfolio


The next research is in accordance with “Tax-Sensible Portfolio Valuation and Efficiency Dimension,” Andrew Kalotay’s imminent article within the Magazine of Portfolio Control, and Kalotay’s “Tax-Environment friendly Buying and selling of Municipal Bonds,” from the Monetary Analysts Magazine.


Say you’ve got a portfolio composed of 2 tax-exempt municipal bonds. How do you decide its worth?


Par QuantityCouponTime to AdulthoodAcquire DateAcquire WorthPresent FoundationPresent Worth
$100,0005%8 yearsTwo Years In the past113.3111.0106.0
$100,0002%8 yearsTwo Years In the past100.0100.095.0

If you happen to liquidated the portfolio, the proceeds can be $201,000. However those bonds are in a taxable account — munis shouldn’t be held in an IRA — and promoting has tax penalties.

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The present tax foundation of the 5% bond bought for 113.3 is 111. Promoting for 106 would lead to a long-term $5,000 capital loss. On the appropriate 20% tax fee, promoting would cut back your taxes via $1,000. Due to this fact, to you the actual price of the 5% munis is $107,000.

Let’s follow the similar research to the two% bond. A sale at 95 would lead to a $5,000 loss and a $1,000 tax financial savings. Due to this fact, on an after-tax foundation, the two% munis are price no less than $96,000 to you.

However bargain munis are extra sophisticated, for the reason that so-called de minimis tax impact should be taken under consideration. De minimis refers back to the tax remedy of the bargain. The achieve on a big “non-de-minimis” bargain is taxed at adulthood as abnormal revenue, at more or less 40%.

For the two% bonds, a purchaser at 95 would have a 2 level tax legal responsibility at the 5 level achieve. On a gift worth foundation, 2 issues 8 years from now are price 1.7 issues nowadays. And this long run tax value is manifested in nowadays’s 95 worth — with out it, the twop.cs can be price 1.7 issues extra, or 96.7!

The patron of the two% munis at 95 is being moderately compensated for the long run tax value. However how a lot are those bonds price to you, bearing in mind that you simply purchased them at par? 

As a result of your tax foundation is 100, you don’t pay tax when the two% bonds mature, and subsequently the existing worth of your money flows is 96.7. This exceeds the after-tax gross sales worth of 96 via 0.7 issues! In buck phrases, the grasp worth of your 2% munis is $96,700. For the reason that grasp worth exceeds the after-tax proceeds from the sale, it will be a blunder to promote simply to save lots of on taxes.

Financial Analysts Journal Current Issue Tile

In abstract, the actual price of your portfolio is $107,000 + $96,700 = $203,700, which exceeds the $201,000 marketplace worth via $2,700. The takeaway is that on an after-tax foundation, the price of a portfolio could also be very other from its reported worth. Promoting at a loss could also be advisable, however watch out with bargain munis: It’s possible you’ll save on taxes however now not sufficient to compensate you for the upper worth of keeping. The purpose is to maximise after-tax worth, relatively than to save lots of on taxes.

Viewing your muni portfolio thru a tax-smart lens will open your eyes to its true after-tax worth.

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All posts are the opinion of the writer. As such, they will have to now not be construed as funding recommendation, nor do the evaluations expressed essentially mirror the perspectives of CFA Institute or the writer’s employer.

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Andrew Kalotay

Andrew Kalotay is a number one authority at the valuation and leadership of municipal bonds. His contemporary center of attention has been on maximizing the after-tax efficiency of one at a time controlled accounts via dynamic funding and gross sales methods. His company’s fixed-income analytics are utilized by main asset managers and risk-management platforms. Earlier than organising Andrew Kalotay Buddies in 1990, Kalotay was once with Salomon Brothers. Previous to Wall Side road, he was once at Bell Laboratories and AT&T. At the educational facet, he was once the founding director of the graduate monetary engineering program at Polytechnic College (now a part of New York College). He’s a co-author of the CFA Stage II studying, Mounted-Source of revenue Research. Kalotay holds a BS and MS stage from Queen’s College and a PhD from the College of Toronto, all in arithmetic. He was once inducted into the Mounted-Source of revenue Analyst Society’s “Corridor of Repute” in 1997.



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