Municipal Bond Forum

Can you educate me about tax-exempt bond amortization? On a bond we bought years ago, we paid 108 per unit. When it came due, we got our 100 per unit back. I would have thought that I had an $8 capital loss because of the sale. But instead, through TEBA, I’m told that I have no such thing. Indeed, the cost basis is back at 100. Is there a relatively simple explanation as to why this is so?

J.H., Vermont

In light of recent bankruptcies in California, supposed experts have commented that other municipalities will find it less of a taboo. Isn’t the real problem behind a bankrupted municipality its inability to borrow? Why isn’t more being made of this point?

G.W., Michigan

Using the best rates that can be found, would you please explain if it is better to invest in zero coupon bonds or traditional bonds? Assume I would reinvest (likely in a savings account, until I have the minimum to reinvest in other bonds) the semi-annual money I receive from the traditional bonds.

J.P.,Pennsylvania

What is your opinion regarding the safety of the city of Detroit’s general obligation, water and sewer munis?

W.L Michigan

My muni bond portfolio pays out almost 5% annually and earns the equivalent of almost 7.5% in taxable income with little risk to my principal. Let’s say I have a bond with a face value at maturity of $50,000. The cost basis is $50,685, the current yield is 4.58%, the current value is $58,700, the estimated annual income is $2,688 and the “unrealized gain” is $8,015. The bond matures on 1/1/21. How do I determine the optimum time to sell these bonds? The unrealized gain will undoubtedly decline as I get closer to maturity. Also, if a bond matures on, say, 1/1/21, but is callable on 1/1/19, what does that mean?

P.P., Arizona

I have been told that it is more likely the tobacco bonds will go into technical default than outright default. Since the payments go on for perpetuity, if revenue is insufficient to make interest payments (or principal repayment), then bonds maturing in 2040 might not be repaid until several years later, but they will eventually be repaid. Also, why aren’t states obligated to buy back some of the bonds? If revenue is less than they need to pay the interest, it means they issued too many bonds.

I.F., New Jersey

I own approximately $2.2 million of New York and New Jersey tobacco bonds. I am told those states did not accept the 54% tobacco bond settlement (“More Concern Over Tobacco Bonds“). I’ve had difficulty finding out how much is being held in escrow for each state and the total amount paid each year.

G.B.

Why does your firm continue to sell tobacco bonds, which you expect will go belly up?

G.R., Florida

I agree with your article (“Don’t be Negative“): Don’t wait. But what do we invest in – low coupons, big premiums and no returns? Oh, seer, what is the answer!

S.M., Florida

As you mention in your article, “Munis Spared from ‘Fiscal Cliff’ Deal,” the tax exemption for munis was left intact. I do think, though, that we will eventually see a compromise somewhere between 28% and unlimited. The possibility gives me more to think about when trying to decide on future income sources.

E.R., Texas