What do you think about GMAC bonds? I am one of your customers.
M.R., Florida
On “Bullish on GM?” and “GM Considers Alliance”cont’d #2
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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.
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On “Bullish on GM?” and “GM Considers Alliance”
I think GM is going down and will be bought by Toyota.
M.B., California
On “Bullish on GM?” and “GM Considers Alliance” cont’d #4
Your opinion on GM corporate bonds is confusing. How can there be an upside when you speak about possible bankruptcy?
V.K.
On “Bullish on GM?” and “GM Considers Alliance”cont’d #3
What everyone seems to be overlooking is the fact that the motor companies still need a contract with the remaining workers that doesn’t pay high school dropouts $150,000 a year to screw nuts onto bolts – or am I missing something? The legacy health costs are still a huge issue for GM and Ford. Eventually there will be an opportunity in these bonds, but I think it is still early. The fact that “analysts” are now recommending the company suggests to me that I am probably correct. I would appreciate your further thoughts on the points above.
E.S., Florida
If bond status changes
If the feds revoke a bond’s tax-free status because of the issuer’s intentional/unintentional violation of applicable federal “tax-exempt” regulations, can a muni bondholder protect himself from income tax liability?
H.B.
Profit on zero-coupon bonds
I am in a bit of turmoil and confused. In 1990, I bought a zero coupon tax-free muni for $9,155 and last year (2005), it reached its maturity and I cashed it in for $25,000. It was a Pennsylvania bond, and 10 years ago, I moved to South Carolina. I thought that no tax would be owed on this bond since it was a zero-coupon muni, but I’ve been informed that I will owe federal taxes on the profit made in those 19 years. Is that right?
G.B.
Sinking fund calls
I have a question regarding mandatory sinking funds. If a muni bond has been pre-refunded and is properly defeased, is the issue still subject to the mandatory sinking fund that was originally part of the issue?
J.M., Michigan
Protesting bond calls
What do you think of muni buyers (and for that matter, other bond buyers) rallying together to stop issuers from calling bonds? When we buy a bond, essentially, we are committing to the issuer to hold that paper until maturity, and with that commitment, we expect a certain return to that point in time. However, when it suits them, they call the bond. Most often, that means that we have to reinvest those funds at a lower rate of return. I know that there is general market into which the bond can be sold by us, but we don’t have the right to go to the issuer and ask for our money back. Has such a move ever been seriously considered?
M.L., Florida
Closed-end funds vs. munis
I think closed-end funds (CEFs) produce more income with no real downside. For example, if I retire with $2 million of taxable funds, why would I want $86,000 (a 4.3% return) with individual AAA long bonds when I can get $106,000 (a 5.3% return) from insured CEFs paid monthly? I understand that CEFs often trade at a discount to their Net Asset Value (NAV), but who cares if you buy them at a discount to NAV? It’s your entry point cost that’s relevant. In fact, you can buy them at a discount and often sell them when they move back to their NAV or to a premium. Tom Herzfeld has a 20-plus year track record of doing so. You often write that muni bonds will go up and down in value over time and that it’s best to disregard that. CEFs are no different, but you’re collecting 100 basis points in additional income each year. Also, CEFs are not very actively managed and management fees are miniscule. You get a diversified bond portfolio by selecting the quality you want and then just buying the discounted CEFs. The professionals from Nuveen, Eaton Vance and others add value as they adjust the portfolios to differing interest rate environments over time and as bonds mature and are replaced. I admire your business and am a periodic customer, but I think you’re biased toward individual bonds. Is my thinking flawed on CEFs?
A.L., Georgia
Adding to your fixed-income portfolio
I already own some individual municipal bonds from you and would like to now add to my fixed-income portfolio. Should I invest in a tax-exempt muni bond fund from a brokerage firm or an individual muni bond from you? What are the pro and cons of these two?
D.Y., California
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