Municipal Bond Forum
Calling ETMs
Q
Your article “ETMs and You” hits the ETM issue right on point, but there is one item that still is rather perplexing: In the case of the New York City escrowed bonds or any other ETMs with call provisions, why would the bonds be called? I understand that any “profit” from the underlying Treasury price appreciation is kept by the IRS, so financial motivation seems to be ruled out, unless there’s some nominal administrative expense associated with keeping the bonds outstanding. Could this be it or is it something else?
A
James A. Klotz responds:
The IRS has prohibited municipal bond issuers from profiting from the arbitrage created by the spread between taxable and tax-free interest rates. However, issuers can still reap the rewards of price appreciation of the escrowed Treasury securities (after taxes).
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