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.
Postings are listed by date. If you have any questions, please call us at 1-800-367-2663 or e-mail us.
On “Hidden Gems in the Muni Market” cont’d #2
Thank you for your reply. It was very easy to understand and I fully agree. After correcting my original analysis, I calculated that the impact of having to pay state taxes on the premium bond reduced its effective return by only 0.04% compared to a par bond. I’ve been on the verge of buying and selling muni bonds with your company, but since the commissions for bonds are typically imbedded with the purchase price (unlike buying stocks), it is difficult for me to calculate how much I actually pay going through a brokerage firm. How do your commissions for buying and selling muni bonds compare with others?
On “Hidden Gems in the Muni Market”
I enjoyed your article about premium muni bonds generally having a higher effective yield, but I’d like to point out what I believe is an equally offsetting downside. As we know, the interest payments by the premium bond are higher compared to the equivalent par bond (i.e. compensation for having paid an upfront premium). Therefore, the state income tax on these bonds (from states other than one’s home state; in my case, Idaho) will be higher because there is no mechanism that I know of for deducting the premium paid for the bonds. So, without finding a legitimate way to deduct the premium for state income tax purposes, I estimate that my additional taxes to Idaho on an out-of-state muni bond purchased with a 6% premium eats up most of the 0.5% higher yield you cite in your article (i.e. 7.8% Idaho income tax x 6% premium = 0.47%).
E.H., Idaho
On “Hidden Gems in the Muni Market”cont’d #5:
Purchasing premium bonds with a yield advantage to the call as well as to maturity will always provide the best value available. When a premium bond matures at par and you paid over par, don’t you get a capital loss? Would that be another advantage for buying premium bond as long as you adhere to the first sentence?
P.Z., Florida
On “For Income Investors, It’s All Bull”cont’d #2
You wrote: “Today, investors can still buy investment-grade tax-free bonds yielding 4.50% to 5.00%. These returns are comparable to 6.92% and 7.69% on a taxable investment for an investor in the highest tax bracket, and 6.25% and 6.94% respectively in the 28% tax bracket.” What short-term bond is paying 5% tax free?
V., California
On “For Income Investors, It’s All Bull”
I read your article and cannot agree with your investing principals. First, I own PIMCO shares, which have the lowest returns in my portfolio. So far this year, my cash flow is up 33% by buying (mostly bond funds) at their lows, drawing the 8% to 10% returns and selling when they hit “premium” status, which produces a little bonus. I then do it all over again. My broker is exceptionally adept at picking discounted bond funds that are poised to climb and also have a good return (7.5% and up) We have checked the tax-free stuff and can’t find one that will keep up with what we’re doing. I don’t know bulls from bears when it comes to investments, all I know is that I buy low and sell high only those investments with 7.5% return (rent for using my money) or better. When the shares hit a high, I collect my bonus and many times, less than one week later, I buy the same shares at a discount. The year so far has been on fire. I hope we can maintain the pace through the last quarter. You might want to re-look at your advice to investors. To my thinking, you are losing a lot of profit for your clients.
R F., Oklahoma
Closed-end funds (cont’d)
I just wanted to see if you would acknowledge the value of closed-end funds (CEFs) that pay 100 basis points more annually than comparable bonds, given your continual encouragement to buy long bonds for income and ignore their price fluctuation, and the futility of trying to guess on rates. Apparently, you will not do so, even outside of the Bond Forum. I guess I understand that this would amount to shooting yourself in the foot with respect to your business, so I certainly understand your position. Your comment about preferred shares makes no sense – one can buy the short-term preferred paper at any time. It is not reserved for institutions. I think what I’m doing – combining individual munis with CEFs for a yield boost, including buying an occasional bond from your company – makes a lot of sense.
A.L., Georgia
State-income tax equivalent yield
I just checked out the site. It is very good. I will probably open an account in the coming weeks. Do you have a formula that can be used to factor state income tax to determine tax equivalent yield? Also do you have a formula to consider when it makes sense to buy munis when someone is paying the Alternative Minimum Tax?
P.
How prices are listed
I was just looking at your unit trusts listing and I’m a little confused. When the bond price is $102, as an example, 15 units should cost 15 times $102 or $1530. Your site shows $15,300. That means the bonds are selling for $1020 per unit instead of $102. Can you please show me where I am miscalculating the cost?
F.L.
Priced too high?
I may have to look for other investments. Bonds are getting priced too high.
K.F., Ohio
Start here.
Do you have specific criteria for bonds you’re looking for? Let us know and we’ll e-mail you bonds that fit your needs. There is no charge for this service.