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 1-800-367-2663 or e-mail us.
I recently purchased several closed-end muni funds at a 12% to 15% discount to NAV. On average, the funds all contain at least 75% AAA bonds. How does one compare this fund “discount” to owning individual bonds?
M.S., Florida
We have a client who has a tax-free bond, therefore the dividends are not reported on his tax return. However, he qualifies for the Earned Income Credit and the amount of dividends would put him over the threshold. Does he still not have to report the dividends in this case?
D.C., Virginia
I read your analyses regularly and thank you for them, but you have stumped me with the GM piece. Is FMS opening a corporate (taxable) bond division? Or has the muni market been so flat for so long that y’all are pushing into equities? Or is this a setup for munis from localities that GM is abandoning? It might help to connect the dots for your readers by explaining exactly how or whether GM’s recent share price and corporate bond prices make a difference to muni investors and to which investors, specifically.
S.P., North Carolina
It seems to me that your firm promotes a yield strategy over a total return strategy. I am interested to know if there is any research that demonstrates that you could have a very low total return year after year while realizing a much higher yield and growing your cash at a steady rate when all is said and done.
L.V., CFA, Nebraska
A majority of my retirement savings is in California muni bonds. In 2005, the unexpected increase in state income tax revenues has been a pleasant surprise. I would like to believe that, as your recent articles state “California’s move rewards bondholders“, California’s economy is strong. However, a fiscal analyst warned that with even a mild recession, California’s financial outlook would be very bleak. Because of Prop 13, the state’s economy does not have a steady source of revenue from property taxes. Instead, the state income tax is the main source of revenue. The New York Times recently had an article on the under-funding of state retirement benefits. The article highlighted what it termed a looming problem. This under-funding has occurred in California. California’s constitution requires that state government pension benefits, once committed to, cannot be diminished. I realize that the constitution sets as a priority, just below payment of pension benefits, the funding of GO bonds. Given California’s aging population, the radical increase in the cost of medical benefits and California’s dependence on income tax revenue, how will the state’s economy withstand a recession?
J.C., California
I was wondering if the Santa Rosa Bay Bridge Zero Coupon Issue CUSIP 802576BU1 (AAA MBIA-IBC Insured) bonds are in default and if this issue is subject to an extraordinary redemption where they can be called at their original issue price of 23.449?
S.W., Florida
What’s the advantage of munis if tax-free income is now being added to social security, which may make munis very unattractive?
What effect do you think this will have on bond yields if all states passed a similar law?
A.F., Connecticut
In today’s market, I can get a four- or five-year CD for 4.50%, AAA, with no risk and no premium. If I’m buying an A-rated muni bond, I want at least 2.5% to 3.0% above prime.
J.Z., New York
I thought bonds subject to the AMT could open one up to taxes, which is why they have a slightly better rate. Is that the risk one takes with the AMT?
G.S.
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