Monday, August 09, 2010

Selling our Bonds

From 2006 to 2009, I had purchased municipal bonds and CDs that were pay 4-5% a year, with the intent of holding the securities to maturity. However, I am now selling some of the bonds in our taxable accounts. Here are the reasons:

  • Our bonds are selling at 3-5% premiums. Due to declining interest rates, the bonds and CDs are priced 3-5% over what we paid. Thus, we would make a unexpected profit from selling the bonds.

  • The capital gains are tax free. Since we still have a capital gain loss carryover, all gains will tax free. On the other hand, all interest received is taxable since it cannot be offset by the capital gain losses.

  • Inflation is coming. Although inflation is low now, I expect inflation to be much higher in the future. The bonds have a premium since the current interest rate is lower than the bond interest rate. However, if interests should rise significantly due to inflation, the bond could fall below the price we paid. In addition, we would be locked into a lower interest rate until the bond matures.

  • Generate cash. In the near term, I believe that stocks are the where I want to invest. Selling the bonds will create cash for stock investment opportunities that arise. Hopefully, the total return will be able to match the 4-5% interest payments from the bonds. To do this, I will be focusing on dividend paying stocks.
  • For now, we will keep the bonds in our non-taxable IRA accounts, since there is no tax benefit to taking the profit earlier. In addition, most of the CDs mature by 2013, with only the TIPS bonds maturing later.

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