How Market Discount Rules Wrecked Muniland

Last week, you may recall, I answered a reader's question about why a municipal bond he owned had dropped so much in price, as measured by the indications given on his brokerage statement.

Turns out I missed a couple of important points. For that I'm sorry, and grateful to everyone who emailed me to point them out. Please don't ever hesitate to do that!

The story wasn't incorrect in any respect, just incomplete. The reader inquired about a 30-year bond, probably the 5.10% coupon Southwestern Illinois Development Authority for Illinois American Water insured water facilities revenue bond issued last June. His statements detailed a drop in price over the next seven months from par (100 cents on the dollar) to about 80. Those prices mesh with what Standard & Poor's J.J. Kenny, a municipal-bond pricing service, says happened to the bond over that period. ...