Annette Thau is the author of “The Bond Book, Third Edition: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” (McGraw-Hill, 2010). Annette has also written more than 20 articles for the AAII Journal.


Discussion

James from IL posted over 2 years ago:

Annette,

I wonder if you are underestimating the political risk of municipal bonds. For example, what happens when the market is no longer willing to buy the debt of either Illinos or California? Do you think the politicians will choose to continue to service existing debt at the expense of state pensions and retiree health care benefits, or will they stiff "rich" bond holders seeking tax exempt income in favor continuing pension and health care benfits to hard-working Americans?

Thanks.

Jim


William from FL posted over 2 years ago:

A couple of comments about the box on closed end bond funds. Another reason for holding this type of security is unrestrained liquidity. Many open ended bond funds (eg Vanguard) have frequent trading and liquidation limits that may effect one's ability to liquidate positions in down markets. Looking and the bond fund duration data will give a index of interest rate volatility. Finally many closed end funds sell at either a discount or premium for long periods. Buying a fund at a discount to NAV does not necessarily mean that it is a bargain. Looking at pricing history is a better way to figure this out.


John from CA posted over 2 years ago:

First, interest rates are at historical lows manipulated by the FEDs. This is not the time to buy bonds. Second the muni market has not changed in 50 years; the spread in 3 percent. Dont try to sell a bond, you may get a low ball bid from an un-named source who is actually your own broker. Ratings are meaningless and can change overnight by several ranks. Insurance, regulated by the NY Insurance commissioner is a fraud. Small bond buyers over the last decade have been screwed by the banks, brokers and insurance companies. Speciffically, we were sold INSURED securities in a market unregulated to control insurance company default and fraud. Yet Wall Street continues to rake in the big bucks and sidesteps regulation attempts.


Will from MA posted over 2 years ago:

Given the assumptions listed, how long would interest payments have to be reinvested in a muni bond fund for the investor to get back to par after a 1% riase in intrest rates?

Assumptions: Duration of 7 years, an expense rations of .25% and a return of 3.8% of tax-exempt income


Don from FL posted over 2 years ago:

Excellent article; thank you.


Patricia from NY posted over 2 years ago:

Being a holder of a municipal bond fund, I feel comfortable after
reading your article


Alan from NJ posted over 2 years ago:

This is an excellent example of clear financial writing. Thoughtful and measured, it is valuable for long time muni investors while being accessible to newcomers. Thank you Ms. Thau and AAII.


Douglas from AZ posted over 2 years ago:

In evaluating closed end funds its also important to make sure that the fund is earning at least as much as it is distributing and that there are unused revenues (UNII) for problem periods. Cefconnect.com has all the info you need to select muni cefs that are paying upwards of 5% tax free.


anonymous from IL posted over 2 years ago:

Great article.


Pete from NJ posted over 2 years ago:

Enjoyed the article and thanks.... Any reason why I would need to diversify my individual bonds among more than one bond shop? I am presently using Stoever Glass in NYC. As you know, they recommend and buy the bonds for me and also hold the bonds. It is a little scary not actually having a bond as proof of purchase but I am told that that is the way it is done today. I do get confirmation statements and monthly statements.

Sound kosher to you ?

Thanks again.


Asghar from CT posted over 2 years ago:

this article is the most informative presentation of bond, bond funds and munis i have ever read.exellent and honest descriptions of bond market.thank you.


Larry from CA posted over 2 years ago:

"Yield to Worst" is not as comforting as it sounds. It does not, according to my experience, take into account sinking fund redemptions scheduled prior to maturity. Such sinking fund redemptions apparently are not considered "calls" as selecting non-callable only securities does not eliminate bonds with sinking fund redemption schedules and likewise such are not considered a 'call' when yield to worst is posted.


Daljit from MD posted over 2 years ago:

Very well explained a must read for all investors.


Joseph Turney from KS posted over 2 years ago:

I did not see any referance to the fact that any premium paid for tax exempt is not considered a loss for tax purposes.


S Frank from CT posted about 1 year ago:

When are the muni bond professionals and bond buyers going to realize that yield to maturity, yield to call or yield to worst do not accurately reflect the yield on a muni bond? For example, if someone buys a bond maturing in 2030, with a 5% coupon and a YTM of 4%, they are not rally earning 4%/year. The YTM, YTC, YTW calculations assumes that the 5% coupon is invested at 4%, which is not likely. I have developed a more accuarte fomula for determing the yield on a bond. While munis still offer a good investment it's a real eye opener to calculate the "true" yields.


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