Municipal Bond Forum
Value may not be related to ability to pay principal and interest
Q
We have several California muni bonds and tobacco bonds that have really taken a beating on their resale bid prices. These are bonds we were led to believe were secure, but apparently had no or inadequate insurance. This has been quite frustrating. In retrospect, we were told these are not the kinds of bonds we should have purchased. The question is, what should we do now? Also, the price or value is down on these bonds, but is the interest earned still on the original purchase value or today’s decreased value?
A
James A. Klotz responds:
Retrospect, like hindsight, is always 20/20.
Unfortunately, we are in the type of investment environment today that enables your next broker to tell you what your last broker should not have sold you, despite the fact he sold the same thing to the client he just lost.
The fact that some of your bonds have declined in value may have very little to do with their ability to pay principal and interest.
The municipal bond market in general, and California bonds in particular, have not been immune from forced-selling by institutions and hedge funds. We would encourage you not to jump to any conclusions in regard to the security of your tax-free bonds.
Your bond interest payments are fixed. They do not fluctuate with the market value of the securities.
Start here.
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