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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.

Postings are listed by date. You may also view postings by topic using the search box below. If you have any questions, please call us at 1-800-FMS-BOND (367-2663) or e-mail us.

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Interest-rate sensitivity


Our financial adviser says long-term municipal bonds “could have a lot of principal risk built into them because of their interest rate sensitivity. The solution is a combination of intermediate-term municipals and a portion of high-income munis to complement them and still maintain decent yields with much less interest rate risk." We’re confused by the term “interest rate sensitivity.”


- M.S.
James A. Klotz responds

“Interest rate sensitivity” is a phrase used to describe the inverse relationship between prevailing interest rates and bond prices. In other words, when interest rates fall, bond prices move higher and when interest rates rise, bond prices decline.

Selling bonds prior to their maturity date can result in a loss if long-term interest rates are higher at the time of sale than they were at the time of purchase.

Our experience as bond specialists has taught us that the additional, reinvestable tax-free income generated by long-term bonds, if held to maturity, more than makes up for any interest-rate risk. A decline in market value is not a loss unless bonds are sold.

Over the life of your long-term bonds, they will sometimes be worth more than you paid for them and sometimes less. Neither situation should trigger a sale as you bought the bonds for a steady stream of tax-free income.


Factors in muni supply


Do you still believe in the premise of your article, “Muni Supply to Remain Tight in 2015”? CNBC today made it sound quite the opposite.


- M.
James A. Klotz responds

Although we expect a marginal increase in new issue volume in 2015, there are many variables that will affect the supply and demand dynamic in the municipal bond market.

Changes in prevailing interest rates can affect the quantity of refunding issues (supply). Additionally, if muni bond funds experience outflows rather than the steady stream of inflows as in 2014, it could turn these funds into sellers rather than high-volume buyers, which would alter the demand side of the equation. Obviously, this would play a big role in determining the "tightness" of the market.


Premium bond called before maturity


In your article, "The Best Play for Today," you say that the best values are premium bonds, even though it may seem "counterintuitive to many investors" (myself included). You have said in the past that one cannot claim a capital loss when a premium bond matures, even though one must pay tax on capital gains when a discount bond matures. My question is, can one claim a loss if a premium bond is called well before maturity, leading to the so-called "yield-to-worst"?


- M.M., Tennessee
James A. Klotz responds

The only time a capital loss can be claimed is if a premium bond is sold, prior to being called, at a price that is below its straight line accretion price.

No loss can be claimed when the bonds are called because the “worst case yield” accounts for the declining premium.


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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.