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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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Though there have been numerous articles on how the new government of Puerto Rico has made great strides in fixing its pension problem and operating budget, the ratings agencies refuse to increase their credit rating and seem to focus on the negative. Where do you think the bottom is on Puerto Rico bonds and how will their electric bond sale affect the market?
- S.S., New York
Having been severely criticized for overrating the mortgage securities that precipitated the financial crisis in 2008, it is understandable that the rating agencies would subsequently err on the side of caution.
In their defense, we must point out that Puerto Rico is “addressing” their fiscal issues, but there is no guarantee of continued success or if current projections will be realized.
We do find it encouraging, however, that professional market participants have recently found these securities to be of greater value.
As we have written on many occasions, all investments contain a certain degree of risk. The higher yields on Puerto Rico bonds reflect this. They are not suitable for very conservative investors.
It is a fool’s errand to attempt to pick the top or bottom of any market. Remember, municipal bonds are purchased for income, not potential capital gains.
As a New York resident, a 5% tax-free yield can be comparable to as much as 10% on a taxable investment when factoring in the exemption from state and city taxes, as well as the 3.8% surtax under the Affordable Health Care Act.
I own Detroit General Obligation water bonds insured by National. My financial adviser told me that as the city’s problems wind through the courts, Detroit won’t pay timely interest and only my principal of $40,000 will continue to be insured by National. The price of these bonds stands at 86.999 as of July 22, 2013, and continues to go down every day. Your thoughts?
- E.M., Michigan
Municipal bonds don't seem to be your financial adviser's area of expertise.
First, we can tell you that Moody’s upgraded National Public Finance Guarantee Corp. to “Baa1” on May 21, 2013, with a "stable outlook." National also enjoys an “A” rating by Standard & Poor's Corp.
If your financial adviser says National will pay principal but not interest on these insured bonds, the market does not agree. Your bonds are insured for the timely payment of principal and interest, as are all insured bonds. If the insurance company wasn’t deemed creditworthy and obligated to pay the interest, the bonds would be quoted at a considerably lower price. Today, these same bonds traded between dealers at over 90.00.
Can you explain what insurance is and how it works? What is the risk? Is a bond with insurance as safe as a CD with FDIC insurance?
- D.R., New York
In addition to being secured by the issuer through dedicated revenue streams, certain bonds are insured by private insurance companies for the timely payment of principal and interest.
The insurance companies carry ratings based on their financial strength.
This private bond insurance should not be confused with FDIC, which is deposit insurance backed by the full faith and credit of the federal government.
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.