Municipal Bond Forum

Diversifying in munis

Nov 30, 2007

I am 63, my wife is 61 and we both work full time. In February 2009, we will receive approximately $250,000 from maturing CDs. Since we were just badly hammered by the Alternative Minimum Tax (AMT) for the first time on our 2007 taxes, I considered acquiring Virginia AMT-free municipal bonds next year with the CD proceeds. In view of our ages and probable retirement within five or six years, I assumed that acquiring bonds that mature in 10 years would be appropriate. I see that in the Forbes article, “Supercharged Munis,” you recommend putting $100,000 into four different tax-free bonds, though I’m not sure whether that should be divided among four bonds or that $100,000 should be put into each of four bonds. In any event, what do you suggest I do with an amount such as $250,000? If you suggest muni bonds, how many would provide adequate diversification and what maturities would you recommend?

P.R., Virginia

Protections in place for California munis

Nov 30, 2007

I am a large holder of California general obligation bonds, which continue to drift down in price. I understand they are obligated by constitutional mandate to pay, but we are seeing many heretofore unheard of events lately. Should I remain confident in the state’s obligation, given the Legislature’s inability to make headway on this huge projected shortfall?

M.J. California

On Don’t Lose Sleep Over Bond Insurers Woes:

Nov 19, 2007

It appears to me that the rating agencies are quite fickle since S&P has made a 180-degree turn and put ACA on negative credit watch with the possibility of a downgrade. ACA just had over a $1 billion write down. In the event of a downgrade below A, it is my understanding that they would have to come up with more than $1 billion in cash. Looking at the stock performance, it is my view that the investing public did not have a great deal of confidence in S&P’s rating view. After all, these are the same rating agencies that rated many Collateralized Debt Obligation (CDO) tranches AAA and have downgraded them several times in a relatively short period of time. Since the issuer pays the rating agency a fee, an inherent conflict of interest seems to exist. Congress and the regulators are just now starting to review this situation, since the public’s confidence in these rating agencies has waned. Beyond quoting S&P’s analysis, what is your internal analyst’s independent view on ACA and what remedies does ACA have now?

B.P., New Jersey

Step-up CDs

Nov 19, 2007

My wife and I have $2 million invested in various forms of fixed income. What do you think of step-up CDs and corporate notes? We are looking at Toyota with a term of 20 years. The rate of 8.56% is guaranteed for the first year. Our goal is to realize as much income as possible while alive and protect the principle that will be left to our heirs when we die. The survivor option is a plus. A major risk that I see is a negative yield curve. Is there something additional that should be considered?

J.C.

Dividends if the NAV drops

Nov 19, 2007

If I buy $1 million worth of a tax-free bond fund shares (say, 133,333.33 shares at $15.00 per share) that is paying a monthly dividend of 5% ($4,166), and next month the NAV drops to $14.50 per share, will I continue to receive dividends of 5% of $1 million ($50,000)? What happens if the NAV increases to $15.50 per share? Can I sell the NAV profit and continue to receive the original 5% of $1 million, the original purchase price?

P.S.

Showing income to the IRS

Nov 19, 2007

I have a question re subject bonds. I know they are tax free, but do you have to show income to the IRS when you file your returns?

P.S., New Jersey

On Don’t Lose Sleep Over Bond Insurers Woes cont’d #3

Nov 19, 2007

If Fitch downgrades the bond insurers, how can there not be a large selloff of insured municipals? How do you expect the muni market to react to the bond insurers being downgraded?

C.

On Don’t Lose Sleep Over Bond Insurers Woes contd #5:

Nov 19, 2007

I’m sure your read the recent Dow Jones article that suggests we are overpaying for insured munis and may actually get a higher yield, with no more risk, on A or better-rated paper that is not insured. The article also advises muni buyers to focus on the underlying rating of an insured bond and avoid them if they are not A rated or better. Most bond brokers never mention the underlying rating unless asked and emphasize that the AAA rating of an insured bond is mostly what matters. How do you feel about this in light of the recent events in the bond insurer arena?

S.F., Connecticut

On Don’t Lose Sleep Over Bond Insurers Woes cont’d #4:

Nov 19, 2007

In your article, you mention that rated bonds are relatively safe. My question is, why would FMSbonds choose to underwrite projects in which the bonds were unrated, such as the Anthem Park issue? Can a buyer of such a bond obtain insurance on his own to get some “peace of mind?

J.R.

ACA rating affirmed

Oct 31, 2007

With the current illiquidity in the market for ACA insured bonds it seems to me that their ability to write new municipal bond business is going to be severely hampered. I would also assume that any new Collateralized Debt Obligation (CDO) business is dead. How can they survive under these conditions? Where are the revenues going to come from?

B.P., New Jersey

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Diversifying in munis

Protections in place for California munis

On Don’t Lose Sleep Over Bond Insurers Woes:

Step-up CDs

Dividends if the NAV drops

Showing income to the IRS

On Don’t Lose Sleep Over Bond Insurers Woes cont’d #3

On Don’t Lose Sleep Over Bond Insurers Woes contd #5:

On Don’t Lose Sleep Over Bond Insurers Woes cont’d #4:

ACA rating affirmed

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