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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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Ambac's future
3/5/2009What would happen to the bonds if a bond insurer, such as Ambac, had its rating cut to junk status or declared bankruptcy? Why should a municipality continue to pay premiums for bond insurance coverage if the bond insurer is bankrupt? Thanks for any light you can shed on bankrupt insurers and the future of the muni bonds they insure.
- B.F., New HampshireAmbac's current ratings are “Baa1” and “A” by Moody's and Standard & Poor's, respectively. Both ratings indicate Ambac's financial strength is of investment grade quality, indicating sufficient capital to meet any claims that may be filed for payment. While recent trends have been negative for many bond insurers, none have reached the point of bankruptcy. Ambac is seeking to develop plans, similar to MBIA, in which it could isolate its public finance business from exposures to sub-prime real estate. State insurance regulators have been working with the bond insurers to keep them sufficiently capitalized to meet future claims. Ambac, as a former “AAA”-rated insurer, has a very strong credit quality book of insured municipal bond business. If its strategy is successful, we do not anticipate a high level of claims from its public finance portfolio.
As far as bond premiums are concerned, these are generally paid upfront at the time of bond issuance for a policy that lasts the life of a bond issue.
Finally, even if Ambac were to disappear, the muni bonds it has insured are of very strong investment grade quality and would be expected to retain their underlying strength. Very few bonds insured by Ambac or MBIA have ever drawn on the bond insurance and we expect that track record to continue.
Unhappy in stocks
3/5/2009I receive about $7,000 annually in dividends from stocks. I need this income, but the tax is killing me. Are there municipal bonds that pay a regular interest/dividend that are tax free? Should I consider selling some of my stocks to purchase them? I'm 61 and want to get more security but don't necessarily want to sell stocks as a panic move. Should I consider mutual funds? My financial planner seems determined to keep me in stocks. My immediate priority is generating income from investments while reducing federal and state taxes.
- J.B., PennsylvaniaWe don't want to upset your investment advisor, but we can assure you that investors who have received their income from municipal bonds for the past 20 years are much happier than those who invested in stocks. If your objective is to produce income, bonds are generally considered the appropriate vehicle, while stocks are usually selected for growth.
Bondholders and Bank of America
3/5/2009What happens to bondholders if Bank of America is nationalized?
- B.C.As with almost every action taken by the federal government, it is impossible to predict the results or the ramifications of government support. Your guess is as good as ours.
When the government assisted AIG, the common stockholders were virtually wiped out, while the bonds continued to pay. Washington Mutual bondholders did not fare as well.
We think the former scenario is most likely, assuming major government ownership in one or more of the large money center banks.
In a joint statement recently by the Fed, Treasury and the FDIC, they emphasized their intention that regardless of any capital assistance program, “banks should remain in private hands.”
Unfortunately, we are in uncharted territory and there is really no way to know for sure.
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.