How Do I Check a Bond's Credit Rating?

My mother-in-law has a school bond with an annual interest rate of 7% sold to her by a broker. How do I check the credit rating? Also, am I missing out on an opportunity to eke out a bit more yield, which would be very good for her at age 76?

-- Bill Beaty

Bill,

To find the credit rating on your mother-in-law's bond, check with the two leading bond-rating agencies: Moody's Investors Service and Standard & Poor's.

To find a Moody's rating, call the rating desk at [phone]. If you know the bond's CUSIP number, that will speed up the process. At some point, a Moody's spokeswoman says, investors will be able to look up ratings on the firm's Web site, but that day hasn't arrived yet.

To find a Standard & Poor's rating, go to the firm's Web site and hit "Ratings Inquiries." From there, you can enter information about your bond electronically. S&P promises to respond via email within two business days. Again, providing a CUSIP is the best way to make sure you get the right information. If your request is urgent, you can call the rating desk at [phone].

As for whether you are missing out on something better, I doubt it. Of course, I don't know your bond, its maturity or quality or even what state you live in. But David MacEwen, a muni fund manager at American Century, tells me that new munis with 7% coupons haven't been seen since at least 1994 and, before that, since the 1980s.

The highest yields currently available in the muni market on low-quality, long-dated paper are under 5.5%. Assuming your bond is rated at least single-A (most school bonds are) and isn't more than 10 years from maturity, comparable paper is yielding 4.5% at most. (See this helpful scale, updated daily by a unit of S&P.)

The only way I can see that your mother-in-law might be able to do better is if she has dropped into a significantly lower tax bracket since she bought the bond. You can use this taxable equivalent yield calculator to determine how high a taxable yield your mother-in-law would need to outdo the yield her bond would fetch if you sold it. (You can read more on this topic in a recent Fund Forum.)

You want to look at the taxable equivalent of the yield your bond would fetch if you sold it, and not the taxable equivalent of the probably higher yield at which you bought the bond, because if you sell, you should receive a price over par, since the coupon is above-market. So when you reinvest the proceeds, you'll be investing more than the par amount you currently have.

Don't forget, though, that if you sell a bond for more than you paid for it, you'll incur a capital-gains liability.

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