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.
Am I missing something? By purchasing tobacco bonds as an individual investor, you say that I am helping the states, not the tobacco industry. Wouldn’t it be more accurate to say that I am helping the investment banks that bought the stream-of-payments from the states, so that those banks spread their risk of loss to individuals like me? If no individual bought a bond, wouldn’t the investment banks get all the income, but also incur all the risk of default?
K.K., West Virginia
In your discussion of investment yields on premium bonds, you do not mention the loss in principal from purchase price to par value when the bond is called or matures, i.e. a premium bond purchased for, say, 115.00 today will pay par, 100.00, when called or at maturity. Would this not reduce the overall return and, under certain circumstances, negate the additional yield on the premium bond?
J.G.
I’ve been reading up on zeros and taxes and such and have a question: With tax-exempt municipal zeros, are taxes due annually as zeros accrete, even though they are tax exempt? There seems to be some differing opinions about this.
T.C., New York
If the Supreme Court rules in favor of the investors, and a state then decides to tax all bonds including its own in-state issued bonds purchased by residents of that same state, how will that effect tax-free interest currently being received from that state’s previously purchased tax-free bonds? Will that state’s previously purchased tax-free bonds then be subject to tax by that state? Will currently tax-free interest then be taxed? Or would the tax go into effect only on bonds/interest purchased after a decision to tax them is announced?
S.G.
In your laddering article, you wrote: “The fact is, laddering doesn’t work for municipal bonds. A more prudent approach to tax-free investing, whose wisdom has been borne out over time, is to maximize cash flow with every purchase.” Does that mean it’s better to buy higher interest, long-term tax-free bonds at a premium to maximize cash flow? Or is it better to buy lower interest tax-free bonds at par or a discount whose taxable equivalent yield is higher? That is to say, should I go for the bonds paying the highest interest (which are at a premium) or go for the bonds with the highest taxable equivalent yield?
I read your article on laddering and the example you gave, which stated that if the $100 bond (paying 6%, or $6/100) value dropped to $50, then you could sell the bond for $50 and buy a similar bond paying 6% for $50. However, would this not yield 6% of the $50, or $3 per 100, and so the income would be halved?
M.F., New York
I was under the impression that a loss from the sale of tax-free bonds is not deductible for tax purposes.
S.F., Connecticut
Would you explain the criteria for applying Alternative Minimum Tax (AMT) and how it’s applied? Also, now that the IRS requires that you must add tax-free income to your gross and adjusted income and figure taxes both ways, “tax free” isn’t going to be “tax free” and people will no longer buy tax-free bonds. Am I, and millions of others, missing something? No one seems to be concerned – at least few, if any are talking about it – including your own organization! How are state, county, etc. governments planning to fund their tax-free shortfall? Your response would be sincerely appreciated – not only by me, but by the millions of others who also read and admire your balanced commentaries.
D.D.
In your reply to the e-mail below, Residency and interest, you state: “Any state with an income tax will tax the interest on ‘out-of-state’ bonds. Naturally, states without income taxes don’t tax bond interest of any kind.” Your answer is not entirely accurate. New Hampshire doesn’t have a personal income tax, but it does tax the interest earned on municipal bonds from other states (but not on New Hampshire muni bonds). This may hold true for other states that do not tax earned income but do levy a tax on residents who earn interest from out-of-state muni bonds.
P.C., Massachusetts
I don’t remember reading anything as cogent and as interesting as your Investor Bond Forum. On a separate matter, does North Carolina tax bonds from other states?
J.V., North Carolina
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