Municipal Bond Forum

FMSbonds, Inc.’s Municipal 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, and other members of the firm as noted.

Postings are listed by date. If you have any questions, please call us at 1-800-FMS-BOND (1-800-367-2663) or e-mail us.

Buying registered bonds

I have one primary requirement before purchasing a bond: I must have the certificate mailed to me after the purchase. I understand that it's inconvenient when selling the bond, but that is not a concern. I do not actively trade in the bond market; rather, I keep the bonds to maturity or the call date. Do you provide this service, and if so, what is your charge to register the bonds in my name and have the interest payments sent to me directly through the paying agent?

Calling ETMs

Your article  "ETMs and You" hits the ETM issue right on point, but there is one item that still is rather perplexing: In the case of the New York City escrowed bonds or any other ETMs with call provisions, why would the bonds be called? I understand that any "profit" from the underlying Treasury price appreciation is kept by the IRS, so financial motivation seems to be ruled out, unless there's some nominal administrative expense associated with keeping the bonds outstanding. Could this be it or is it something else?

Muni bonds for school improvements

My county wants to issue $60 million in bonds for capital improvements to our school system. Many question the advisability of using bonds vs. some other form of ad valorem tax or use of a lottery or sales tax. I think alternatives to the bond issue might, in the long run, be more expensive and less suitable to the intended purpose. The bond issue seems to be advantageous in that it obtains the money up front and is, in effect, a sunset law that expires on the maturity date. As we all know, taxes go on forever, even after the original purpose has ceased to exist. Further, the cost to the taxpayer will be less with a bond issue than with any other means of obtaining funding. Assuming a 30-year issue with a base interest rate of 4.5%, the county would need to raise about $2.7 million annually for interest payments and create a sinking fund of under $2 million to cover payments at or before maturity. These funds could likely be obtained by some form of property transfer tax, so future residents would be assuming a fair share of the school expense burden. Am I off the wall? Is there a better way to raise this money? If bonds are the way to go, what interest rate and term should be expected?

MBIA and investor comfort

Like many other Americans, I am growing weary of corruption and fraud in major companies. The most recent company facing serious allegations of misconduct is MBIA (Rating Agencies Say MBIA Still Solid), no small player in the municipal bond market. Is this the tip of an iceberg? Are the bond insurance companies so eager to issue and so closely tied to the ratings agencies that they are getting reckless? It seems to me that most municipal bonds are now insured, clearly suggesting to a trusting public that there is little risk of default. Some of these insurers have been in business for only a relatively short time and have hundreds of billions of dollars in guarantees out there. Where can investors get information on the underlying credit ratings of muni bonds? Most brokers and dealers show only AAA when the bond is insured. False comfort?

Mismanagement when bonds are called?

As a trustee of a non-profit organization and without financial background, I am frequently confused at the discussions about the $30 million portfolio. Are there any rules that would point to carelessness? Twenty years ago, I was told that if bonds are called on a regular basis, it indicates a lack of attention because we should be selling them before they are called. What should I look for to determine if our broker's buy/sell recommendations are maximizing his commissions? If, for instance, we are investing $150,000, would it be better to buy one bond or three $50,000 bonds? I understand diversity is an issue, but are commissions and fees based on the total dollar amount or the number of bonds purchased?

Using funds in a qualified plan to buy muni bonds

My husband and I are looking into investing in bonds to generate an income stream so we can build a retirement home and use the money to pay the mortgage. What tax implications are there for taking money out of a 401K or an IRA to invest in the bond market? We think that this might be the best way to go for us, but we have to look at the cost involved. Can you offer any information regarding this dilemma?

Converting AMT bonds

Over the years, I've used the usual formulas of taking my federal tax bracket and the smaller correction for the state tax bracket in calculating the effective yield of a taxable interest investment and comparing the result with a non-taxable yield. In the past couple of years I've been subject to the Alternative Minimum Tax (AMT) and it appears that the effective interest earnings on bonds subject to AMT becomes significantly lower. Should these bonds be sold and replaced with non-AMTs or does the cost of selling and buying replacement non-AMT bonds result in a "wash"? This probably needs to consider the maturity of the AMT's but I would appreciate your thoughts.

Laddering if interest rates jump?

Regarding your articles about problems with laddering: have you considered that if interest rate jumps to 10%, your original investment of $500,000 will decline? The principle investment value will be much less than $535,000.

Premium bonds

I will retire in about five years and would like to have some income and also be able to keep the feds from taking so much. What do you think? My wife and I have a joint annual income of about $115,000, which puts us in the 25% federal tax bracket. We paid about $2,500 last year in federal taxes. I would like to buy muni bonds, about $75,000 worth, with a maturity date of about 10 years. I don't mind paying premium prices based upon your explanations in other responses I read. However, will premium prices paid exceed the money we will make from interest earned over a 10-year period of time? Are munis suitable for us? I saw under one of your links - "insure bonds" - there was a column representing coupon, yield to maturity and, finally, worst yield. What is the difference between coupon and yield to maturity?

Barbell?

I have recently refinanced property I own that had $975,000 in equity. Now, after the refinance, I have about $480,000 left in equity and I will receive about $400,000 in cash. I'm 35 and already have $150,000 in the stock market (half of that is in my retirement accounts). My federal, state and local tax rate equals about 40%. I am not really interested in buying a place to live at this time. I am very interested in buying into the bond market, with two goals in mind: decreased tax liability and increased cash flow. I'm new to your site, so am only beginning to find out that you are the first source of information of the many I've consulted cautioning against a laddered municipal bond portfolio. But I wonder, what your thoughts are on a barbell portfolio? Or do you think it's best simply to go for the highest yields within my comfort zone?

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