Municipal Bond Forum

If I buy a bond, can I sell it before its maturity date? Will I lose any money? If a bond has a coupon rate of 6.125% and WCY of 3.64%, how much interest will I earn?

A.B., Connecticut

I was told that you need to compare yields to worst case scenario (calls) rather than yields to maturity since bonds are priced to the worst-case scenario. Do you agree? If so, do you then suggest that I buy the highest “worst case” yield instead of the highest yield to maturity?

C.V., California

I wanted to invest my money after Greenspan spoke recently, expecting to invest at higher rates since everyone expected the Fed to raise rates. What’s going on? Why are rates not rising? The long end of the muni curve was higher yielding before Greenspan spoke. The short end of the curve is also lower yielding before Greenspan spoke. Should I continue to wait knowing that the Fed will continue to raise rates in the future? Is this rally in the market just a fluke?

C.V., California

As you state in the article ETMs and You, “The concept is simple: when buying ETM bonds, investors should be certain that all calls have been defeased or the bonds have been priced to the call date.” While that may be simple to you, it’s not that simple for individual bond investors to ascertain that an ETM bond’s calls have been defeased and the bonds have been priced to the first valid call. How many investors know where to find this information? If an ETM bond’s description doesn’t state anything, are we to assume that its calls have not been defeased and it is not priced to its first call, or are we to assume the opposite? Two simple categories in your bond descriptions would alleviate this concern for investors: “This bond’s calls have been defeased: yes or no,” and “This bond is subject to call before the ETM maturity date: yes or no under no circumstances.” With these two descriptive categories and a mandatory “yes or no,” much confusion and suspicion would be eliminated. Now it appears that the investor is subtly being told, “Let the buyer beware,” which not only alienates the investor but probably deters future investment. One municipal dealer I used to deal with actually had a category, “callable.” However, there were instances that when it said “no”, the “no” wasn’t really a “no.” There were extraordinary call provisions that would make that “no” a “yes” and the investor didn’t find out about it until it was called.

J.M., Illinois

First, I want to say that I thoroughly enjoy your columns. My question is concerning Early Redemption. As I understand it, most bonds are subject to early redemption. It seems that ER makes the yields completely unpredictable, as the bond issuer may redeem (call?) the bonds at any time regardless of the call features. Can you please comment?

M.M., Ohio

I’m 35 and currently a California resident. If I buy really long-term California municipals with the intention of holding them until they mature, am I constraining myself for the tax benefits to remain a California resident for the long term? It’s too soon for me to know where I’ll want to live in five years, much less 30. If and when I move elsewhere, I could sell the California bonds and replace them with bonds from my new resident state, but that would involve transaction costs. Also, it would undermine the buy-and-hold strategy and put me at risk of selling at a discount. Are municipal bonds best as an investment for people who know that where they live is where they’ll always be? Thanks for a very informative site with well-reasoned and persuasive advice.

S.O., California

I own a number of long-term PA zero-coupon muni revenue bonds. All of the bonds are AAA insured — many are also ETM — and they reflect revenue from water and/or sewer systems. All of the bonds were listed as “non-callable” when I purchased them, with no conditions attached whatsoever. If the worst were to happen to one or more of the water/sewer systems whose bonds I hold (e.g., large-scale destruction or significant long-term disruption due to terrorism, major earthquake, etc.), can these bonds be called (i.e., paid off at less than par prior to maturity) even though they were listed as “non-callable” when I purchased them? Or would I still be able to count on the $1,000 per bond value at the original maturity date of the bonds? I have received much conflicting advice on this from different brokers.

A.B., Pennsylvania