How to Read a South Carolina Tax-Free Municipal Bond in the Secondary Market

Most municipal bonds are found in the secondary market, meaning they were issued years ago, and the bondholder decided to sell their position in the open market. This is where people looking to invest new money in South Carolina tax-free municipal bonds can go to “shop.” Let’s look at a few examples and the different components of specific bonds (this is NOT an offering to sell securities, this is for illustrative purposes only):

10M BEAUFORT COUNTY SC GO BONDS 4% DUE 03/01/2015 106.59 0.341% YTM

10M CHARLESTON COUNTY SC PARK & REC GO BONDS 2% DUE 02/01/2016 103.77 0.623% YTM

10M HILTON HEAD ISLAND SC BONDS 4% DUE 12/01/2019 109.237 0.4245% YTM next call 12-01-2015 @ 100.00 2.474% YTC

The first example is a General Obligation bond issued by Beaufort County. Ten bonds cost $10,659 and the coupon or annual interest is 4% or $200 paid March 1st and September 1st until maturity on 03/01/2015, when the bondholder will receive return of principle of $10,000. The yield to maturity is 0.341%.

The second example is a Charleston County Parks and Recreation bond. Because the description says “GO,” we know it is a General Obligation bond backed by the full faith of Charleston County, as opposed to a revenue bond backed by some type of park or recreation facility user fees. Ten bonds cost $10,377 and the coupon or annual interest is 2% or $100 paid February 1st and August 1st until maturity on 02/01/2016, when the bondholder will receive return of principal of $10,000. The yield to maturity is 0.623%.

The third example is a Hilton Head Island SC bond that matures in 2019, but starting in 2015 the issuers may redeem or “call” the bond early. Ten bonds will cost $10,923 and the coupon or annual interest is 4% or $200 paid June 1st and December 1st until the bond is redeemed or matures on 12/01/2019, when the bondholder will receive $10,000. The yield to maturity is 0.341% and the yield if the bond is redeemed early in 2015 is 2.474%.

The three key components of any municipal bond are the issuer, coupon and maturity. When they are first issued, they are usually priced at par or 100.00, which means $5,000 per every five bonds. Almost all municipal bonds trade in increments of 5M or $5,000. You may purchase a minimum of 5M, or in increments of 5’s thereafter. Bond dealers used to trade in minimums of 25m and 25m increments, but with the enhancements of technology the minimums are now lower. South Carolina has many different issuers with various maturity dates to choose from, so it may take time but you can build a well-diversified portfolio of home-grown Palmetto state bonds!

p.s. if there is any material information relevant to the bond it must be disclosed. For example, if there has been a rating change you would likely see “ME” or “MATERIAL EVENTS” next to the bond description, and the dealer would provide you with additional disclosure.

© 2013 Pawleys Investment Advisors, LLC. All rights reserved.

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