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.
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
I am new to your site and enjoy it. I have started investing in long-term munis with the idea of buy and hold. Since many of your articles/strategies seem to echo that philosophy, I couldn’t be happier. All of my bonds are, of course, callable, so my question is: What is the probability that the municipalities will call my bonds prior to maturity? Over the past, say, 30 years, what proportion of callable bonds have been called? What signals will alert me, say a year or 18 months in advance, whether my bonds are likely to be called?
J.F., California
I was under the impression that a tax-free municipal was just that – tax free. However, I have learned that if you are in the position that your social security benefits are taxable, any tax-free income is included when figuring your tax liability. What, if any, would be the advantage of a muni bond when there are so many other choices with better returns at shorter-time terms?
C.V., Michigan
I hadn’t realized that the states and big tobacco companies were now in bed together, hoping to keep their market share strong in order to collect big bucks. I guess we still have states supporting tobacco growers with subsidies so people will be employed, smoke, get cancer and die. Then the states can sue the tobacco companies to get money, and the more people smoke, the more money the states get. No wonder governments are incomprehensible. They can be – and are – squarely on both sides of the issue. I tried to explain it to a visitor from Europe but gave up.
R.A.
I’ve heard that you don’t have to report nontaxable income, but I’ve also heard the contrary – that you do need to report the income on your federal tax return, although it is not subject to taxation. Which is correct? Thanks – I’m a customer and I like your Web site.
K.F., Ohio
On Suze Orman’s affinity for zero coupon municipal bonds: What about the AMT taxes she faces? Perhaps her wealth is now so much that she can afford peace of mind. But I don’t get the zero coupon muni bonds. She has a negative cash outflow because she still must pay federal taxes on the capital gains the bond have each year. To my knowledge, the government looks upon the appreciation in value as a capital gain, not interest income. Hence, is it a taxable event?
J.B.
Why would an individual not invest in leveraged closed-end bond funds and pick up an additional 50 to 100 basis points of yield rather than buying individual bonds as well as professional bond management?
A.L., Georgia
I have been retired since age 55 and done reasonably well on my investments. As I approach the magic age of 59 ½, I am considering moving some of my money into bonds with the hope of just living off the dividend income. Since the vast part of my investments are in IRAs, is there any advantage of buying municipal bonds inside the IRAs? I thought that the dividends that I would be taking might have some tax advantage.
R.T.
If tobacco bond indentures include covenants that would sanction changes in their payment obligations if the MSA were modified, is it conceivable that government tobacco bond issuers might try to minimize payouts to better reflect tobacco firms’ reduced MSA payments? Would such bond indenture changes withstand legal challenges?
J.S.
Cigarette sales have dropped, and because industry payments to states are based to some extent on the number of cigarettes sold, the states’ settlement revenue has dropped. States that were part of the settlement initially expected about $6.5 billion this spring, for instance, but the tobacco companies have said that they may be entitled to cut their payments by as much as $1.2 billion this year. Some of that decline would be the result of dropping sales, and some could come from other adjustments allowed under the settlement. Since state obligations under the tobacco bonds is limited to settlement proceeds paid by the tobacco companies, how would declining receipts impact the credit worthiness of tobacco bonds?
J.S., Washington, D.C.
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