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.

What to look for – and avoid – in a muni bond broker

We have a “prudent-investor” broker with another firm who put over $1 million into Puerto Rico bonds. We almost “killed” him when we found out what he did. Now we have to watch him very carefully to make small investments and gain a decent return. Any advice? We have about $2 million still invested. We understand a lot depends on the actions of the current government in Puerto Rico, which is very slow to react.

M.G., New York

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Premium paid on muni bonds is a return on principal

I have a question about municipal bonds selling at a premium: If I buy, for example, a 10-year face-value muni bond with a 5% coupon for $1,000 par and pay a 10% premium over par, I pay $1,100 to buy the bond. When the bond matures, I get back $1,000 and earn the stated yield-to-maturity when I purchased the bond. Assume that I can roll over a maturing $1,000 bond and use the proceeds to obtain a new bond selling at $1,100. To obtain the $100 premium, assume I go into my checking account.

Isn’t the upfront $100 premium simply returned to me over the life of the bond in the form of a slice of each coupon interest payment? That is, isn’t repayment of the $100 premium simply a return of my investment ($100), not a return on my investment ($100)?


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Medicare Part B and tax-exempt income

I can sign up for Medicare soon and just learned that my rate for Part B could be double the minimum most others pay because the government will go back and refigure my taxes and add my tax-exempt interest to my income. This is very unfair. Has your company, and others that sell bonds, been contacting our representatives and trying to get this changed?

R.L., Missouri

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Too quick to judge merits of premium muni bonds

I live in a retirement community where the chief financial officer is a volunteer and not educated in investments. We have a $2 million bond portfolio that she manages. She buys all five-year, high yield (4.00% to 5.00% in today’s 1.00% market) munis with stiff premiums. A recent purchase was a $50,000 par value 4.90% California muni with a five-year maturity (we live in CA) for which she paid over $58,000. The whole portfolio is like that. Please explain why she shouldn’t buy premium bonds; she won’t listen to me. Or call me crazy and tell me it’s OK to rack up $80,000 in premiums in this portfolio.

C.G., California

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HQLA Rule Change Good For Muni Investors

I’m surprised by your article, “House Votes To Treat Munis As ‘High Quality’ In Bank Rule.” Munis mainly trade by appointment only, and based on my own experience during the 2007-2008 crisis, there was a lack of liquidity in munis, with prices taking a beating.

Now, don’t get me wrong, as I bought into the distress we were experiencing back then and wound up with very profitable positions in the end.

But given how few munis trade in any size, other than maybe “AAA” and “AA” bonds issued by states, I’d hardly call munis a highly liquid class of instruments.

I think the House bill is ill informed. In the past, you’ve said munis are bought mainly to buy and hold until maturity by retail investors, so why would those types of investments now be considered good sources of liquidity for big banks during times of stress?

Seems a bit disingenuous to me, given all your past postings.


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But what about inflation?

In your interesting article, “Just How Smart is the ‘Intelligent Investor’?” you seem to avoid considering inflation. While it’s low now, historically, it can be quite high. Thus, a 4.00% real yield for a long-term bond can be eaten by inflation down to almost nothing or worse by the end of its term. In addition, though the risk of default is small, it is no longer as small as it was in the past. I’ve had several bonds default in whole or in part. In addition, if for any reason you need to sell the bonds and the interest rate has moved up, as it most likely will, you will lose capital. For those reasons, long-term-munis are not as attractive as you present them. But I bet you knew all that! I’ve been in and out of munis for more than 30 years.

G.H., California

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