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.

Investing idle cash

I was very pleased to stumble across your Web site and find a firm that supports my investment strategy. I therefore trust your answers to some questions that I have (and believe me, that says a lot). My family has invested in municipal bonds for generations and I have followed suit. I am currently managing my portfolio exactly as my father and grandfather do, but I have some questions that I would like you to answer because their answers are simply that it’s “the way we’ve always done it.”

First, I only buy long-term premium munis for the highest Yield to Call/Yield to Maturity that I can find, exactly as you suggest. I normally wait for the interest to build to a certain amount before I buy another bond. I do this because I can get a better price by buying a bigger chunk of bonds. It takes a few months to get to this point, and I sit on the cash in the meantime. (It’s actually in a type of money-market account.) If I don’t need all of the income to live off of, how would you suggest investing it until I have enough to buy another bond?

Second, I currently live in Washington, D.C., where my munis from all over the country are triple exempt. If I decide to move to New York for a few years with the intention of returning to D.C., what would you recommend doing? I obviously don’t want to liquidate my holdings and reinvest them in N.Y. bonds because, for one, I would get hosed on the bid/ask spread. Should I just weather the few years and pay the state and local tax? Third and finally, when a muni is pre-refunded, do you recommend selling it?

T.B., Washington, D.C.

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Hazy about tobacco bonds

I saw an ad about your site in Sunday’s paper. Just went online to investigate it but was turned off on your story about “good news for the tobacco investor.” You guys completely turned me off with it seems support for the tobacco industry. I can find investments many other places and will skip your site.

G.R., New York

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Capital Appreciation Bonds

I am in a bit of a quandary. I am attempting to find specific information on CABs (Capital Appreciation Bonds), such as how they work exactly and the relation to a refinanced structured loans. If you could provide any reference material or point me in the right direction I would greatly appreciate it.

J.A., New York

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Don’t forget state income taxes when determining taxable equivalents.

In K.B.’s inquiry of 2/09/05 (see below, “Taxable equivalent”) pertaining to computing equivalent returns on taxable vs non-taxable bonds, you referred to a chart entitled “Tax-exempt/Taxable Yield Equivalents” in the Bond Basics section of your Web site. The problem is, it doesn’t give the complete picture on equivalents. It pertains to federal tax only and therefore is applicable only to those few states with no state income tax. Most people reside in states that have state income taxes and, obviously, this tax must be considered when computing equivalents between taxable and non-taxable instruments. In California, where I reside, the maximum income tax rate is 9.3% – a substantial amount. To determine if a state tax-exempt bond or bond fund is appropriate, one must compute the tax-exempt bond or bond fund’s “taxable equivalent yield.” This figure enables one to take federal and state income taxes into account when comparing the potential returns from taxable and non-taxable instruments. For completeness, I believe it should be mentioned when questions arise relating to equivalents between tax exempt and taxable instruments.

C.A., California

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Finding pre-refunded bonds

I am interested in municipal bonds that are pre-refunded and collateralized in U.S. securities. The maturity can go way out, as I want high interest. Why do you rate some of the municipal bonds insured by MBIA as AAA? Do you think MBIA could weather two or three bankruptcies in municipal bonds? I think it’s doubtful. I consider insurance on municipal bonds valueless. Are you a member of CIPA or SIPC?


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Are high yields and early call dates linked?

I have been investing in municipal bonds for the last three to four years simply because they provided a reasonable rate of return relative to risk. I have noticed that the high yields and early call dates are related. What I mean is, when the rates (yields) are at historic highs, the issuer usually puts in a call date at five to 10 years on a 30-year bond. So there is no point in waiting to time the market (assuming you can do it) because you can’t really lock in the rate for 30 years. If rates do fall five to 10 years from the issue date, the issuer can call. I observed this on the following basis. If rates now (about 4.5%) are low compared to historic highs (10 to 12%), then I do not see any bonds available today with a coupon of 10 to 12% at a high price to compensate for today’s relative lower rate. Given this, there is no reason to wait to lock in a rate even if there is a fairly general consensus that rates will go up in the next year. In your long experience, have you seen bonds issued at high rates (10%) comparable to long-term S&P average rates without call features? Did anyone get lucky?


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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?


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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?

J.M., Michigan

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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?


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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?


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