A bond that’s trading at a premium means that its price is trading at a premium or higher than the face value of the bond. For example, a bond that was issued at a face value of $1,000 might trade at $1,050 or a $50 premium. Even though the bond has yet to reach maturity, it can trade in the secondary market.

What is the coupon rate of a municipal bond?

The coupon rate is the annual income an investor can expect to receive while holding a particular bond. It is fixed when the bond is issued and is calculated by dividing the sum of the annual coupon payments by the par value. At the time it is purchased, a bond’s yield to maturity and its coupon rate are the same.

How are muni bonds priced?

The bond price is the dollar amount an investor pays for a bond. The convention is to express price as per $100 of face value. Bonds can be priced at par (100), premium (above 100), or discount (below 100). semiannually, so the payment would be paid in two installments.

How is the premium paid on a municipal bond reported?

The premium must be amortized and subtracted from the OID interest reported as either taxable or tax-exempt interest on Form 1040. The requirement to amortize the premium paid on a municipal bonds prevents you from claiming the premium as a capital loss when the bond matures at the face value.

What are the benefits of investing in municipal bonds?

The major benefit of investing in municipal bonds is that the interest earned from the bonds is exempt from income tax. If you purchase a bond at a premium, the premium amount will eventually be lost when the bond matures at face value.

Do you pay tax on coupon on municipal bonds?

If it’s a taxable bond, you pay income tax on the coupon income. If it’s a tax-free municipal bond, you don’t. The tax treatment of bonds bought at a discount or a premium and either held to maturity or sold is not simple.

When is the best time to sell a municipal bond?

Should you choose to sell prior to the maturity date, your gain or loss will be dictated by market conditions, and the appropriate tax consequences for capital gains or losses will apply. The most basic strategy for investing in municipal bonds is to purchase a bond with an attractive interest rate, or yield, and hold the bond until it matures.