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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.

Rolling over bond fund money to an account with individual bonds

Oct 13, 2005

I will be retiring within two years and will have a defined benefit plan retirement of approximately $5,000 per month. In addition, I have another tax-deferred benefit plan, 100% of which is invested in a bond fund, which has been good to me over the last two years, although it has declined in value recently. When I retire, I would like to roll the bond fund over to another tax-deferred account. The balance in the bond fund is approximately $650,000. I also have real estate valued at approximately $800,000 (no mortgages) and cash reserves of $130,000 in CDs. I have been reading the Bond Forum and know how you feel about bond funds. Can I roll over the money in the bond fund to a tax-deferred account owning individual bonds? My lifestyle is such that I don’t need additional income to live on.

G.L., Arkansas

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State bond banks

Oct 12, 2005

Would you please comment on state bond banks and what similarities and differences exist between their offerings and ordinary general obligation municipal bonds?

S.K., Texas

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Long ladder

Oct 10, 2005

You regularly write against laddering, justifying the position partly by saying that the typical ladder goes out only 10 years. However there is no reason to limit a ladder to 10 years. A ladder can go out 20 or 30 years. If that is done with an initial large sum, then as each group of bonds becomes due, they are replaced with bonds with the most distant maturities. If interest rates stay the same or fall, one will give up some return. However, one will have some protection in case there is a steep rise in interest rates. As we all agree that the future course of interest rates cannot be predicted with any accuracy, a steep rise in rates is a clear possibility. It seems to me that your recommended strategy – putting all funds in the longest maturities – is very risky for investors looking for a safe return. The fact that it would have worked well in the last 10 or 20 years is not meaningful when interest rate cycles tend to be much longer than 10 or 20 years. It is also worth noting that if one had a regular stream of funds (say, every few years) to invest, and followed your strategy of buying only long-term bonds, one would eventually end with a laddered portfolio.

R.A., Illinois

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Key is net-after-tax return

Oct 6, 2005

I’m 66 and retired. I’m selling my house and will have about $500,000 to $600,000 to invest in a fixed-return investment. I live in Washington with no income tax and was interested in whether you recommend munis over Treasury bills. I’m of course looking for the highest return on my money as I have no other income and don’t see being able to reinvest any of the interest.

K.S., Washington

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Short-term ‘layering’?

Sep 29, 2005

I could be wrong, but what about the strategy of short term layering of bonds (two to five years) in a rising interest rate environment? How much would interest rates have to rise over the next few years to counter your view on the disadvantages of laddering?

N.F.

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RANs

Sep 27, 2005

If a town issues both rated G.O.s and unrated Revenue Anticipation Notes (RANs), can the same rating be assumed for the unrated RANs?

V.L, Massachusetts

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When bonds are subject to AMT

Sep 22, 2005

You say that a bond subject to AMT should be clearly noted in the description of the bond. I do see that some bonds say “Subject to AMT” in the description and some say “non-taxable.” Is there any other type of “tax status”? Does non-taxable mean tax exempt from federal and state taxes (assuming the bond is issued in my home state)? Can you elaborate a little on AMT status? We want to invest some more money in tax-exempt bonds and have begun researching the best way to do that. While we certainly don’t need another company to deal with, we are considering consolidating some of these accounts. How are you different from these other companies?

L.B., Missouri

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Mismanaged accounts

Sep 19, 2005

I agree with your philosophy as far as bond management. What is your opinion on advisors who recommend active bond management as a separately managed account to capture gains and losses. They say they get better institutional pricing, which more then makes up for the yearly fee, which is a percentage of assets.

A.C., New Jersey

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Who to trust?

Sep 9, 2005

It seems that every time I suggest to my broker that he consider some of your Web site information that contradicts his opinion – for example, waiting for interest rate moves and a laddering approach – he dismisses it as being information that is designed to encourage investors to put all their money in a bond program, rather than other alternatives. How do you determine what’s best for the average investor?

C.M.

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