Municipal Bond Forum

Closed-end funds vs. munis

May 2, 2006

I think closed-end funds (CEFs) produce more income with no real downside. For example, if I retire with $2 million of taxable funds, why would I want $86,000 (a 4.3% return) with individual AAA long bonds when I can get $106,000 (a 5.3% return) from insured CEFs paid monthly? I understand that CEFs often trade at a discount to their Net Asset Value (NAV), but who cares if you buy them at a discount to NAV? It’s your entry point cost that’s relevant. In fact, you can buy them at a discount and often sell them when they move back to their NAV or to a premium. Tom Herzfeld has a 20-plus year track record of doing so. You often write that muni bonds will go up and down in value over time and that it’s best to disregard that. CEFs are no different, but you’re collecting 100 basis points in additional income each year. Also, CEFs are not very actively managed and management fees are miniscule. You get a diversified bond portfolio by selecting the quality you want and then just buying the discounted CEFs. The professionals from Nuveen, Eaton Vance and others add value as they adjust the portfolios to differing interest rate environments over time and as bonds mature and are replaced. I admire your business and am a periodic customer, but I think you’re biased toward individual bonds. Is my thinking flawed on CEFs?

A.L., Georgia

Adding to your fixed-income portfolio

Apr 13, 2006

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

Will my bonds be called?

Apr 13, 2006

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

Is shorter better?

Apr 10, 2006

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

Odd couple

Apr 5, 2006

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.

Report nontaxable income

Mar 24, 2006

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

Closed-end bond funds

Mar 20, 2006

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

On “Look Who Else Likes Munis”

Mar 20, 2006

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.

IRAs and munis

Mar 17, 2006

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.

Tobacco consumption cont’d #2

Mar 17, 2006

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.

1-800-367-2663

1-800-367-2663

Closed-end funds vs. munis

Adding to your fixed-income portfolio

Will my bonds be called?

Is shorter better?

Odd couple

Report nontaxable income

Closed-end bond funds

On “Look Who Else Likes Munis”

IRAs and munis

Tobacco consumption cont’d #2

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