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Municipal Bond Forum

FMSbonds, Inc.'s Bond Forum™ is an exclusive opportunity for investors to submit questions and comments on the bond market or to respond to one of our articles.

To participate, just send us an e-mail. Be sure to include your name or initials and your state of residence. Posted e-mails may be edited for length and clarity. If you prefer a private response, please note that in your e-mail. Responses are provided by James A. Klotz, president and co-founder of FMSbonds, Inc., a municipal bond specialist for more than 35 years; Dr. Jay H. Abrams, chief municipal credit analyst; and other members of the firm as noted.

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Insurance refund for called bonds?

My understanding is that municipalities generally pay an upfront fee to bond insurers to wrap their bonds until maturity. If a municipality calls a bond early (for example, to refinance), does it get a pro-rated refund or does the bond insurer get a windfall profit? - M.M., Tennessee
James A. Klotz responds

The issuer pays an upfront premium to the insurance company, which agrees to insure the bonds as long as they are outstanding.

There is no refund if the issuer decides to retire its bonds prior to maturity.

Remember, the true value of the insurance to the issuer is the ability to borrow at a lower rate.

Good news or bad news?


Is your article, “Puerto Rico Moves To Strengthen Bank, Defend New Law,” good news or bad news?


- M.B. Texas
James A. Klotz responds

Although many analysts believe the Puerto Rico Electric Power Authority is likely to move to restructure its debt, there is no consensus as to what form it will take, when it may happen or the affect it may have on other Puerto Rico entities.

Pending litigation challenging the new Recovery Act also makes the eventual outcome less predictable.


Insured vs. uninsured Puerto Rico bonds


With regard to the fiscal situation in Puerto Rico, do you believe there will be any difference between Puerto Rico municipal bonds that are insured and those that are not?


- J.P.
James A. Klotz responds

Municipal market participants apply a clear and distinct premium to the value of insured Puerto Rico bonds.

The rating agencies have recently affirmed the ability of Assured Guaranty (AGM) and National Public Finance Guarantee Corporation to cover any claims arising from the default or restructuring of any Puerto Rico governmental entity.


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This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.