- Some of your savings
bonds may not be currently paying you any interest at all.
- Strategically redeeming
certain savings bonds over time may save you thousands of
dollars in interest and/or potential taxes.
- It is easy to find out
exactly what your specific savings bonds are paying and for how
U.S. Savings Bonds
If you own U.S. savings
bonds, an appropriate exit strategy could literally save you
thousands of dollars. For example, investors may be able to avoid
being bumped into a higher tax bracket by simply spreading out their
bond redemption over numerous years. Selecting the least beneficial
savings bonds to redeem first, and holding certain others somewhat
longer, is also a smart strategy. EE bonds purchased from June 1994
to April 1995 have a special catch up feature that boosts the rate
of return to an annualized rate of 16% during one six month period
in the fifth year of ownership. Savings bonds purchased after May
1997, on the other hand, impose a three month interest penalty for
selling in less than five years. The EE savings bonds issued from
May 1995 to April 1997 are pegged to market rates every six months,
and thus, have consistently been the lowest yielding among the group
over the past several years. Cashing in Bonds at the wrong time cost
savers an estimated $100 million a year in lost interest. In
addition, there are nearly $6 billion of savings bonds still out
there that have ceased paying interest altogether.
Investors can write to the
Bureau of Public Debt, P. O. Box 1328, Parkersburg, WV 26106 or
better yet, visit their web site at
http://www.publicdebt.treas.gov/sav/sav.htm (Press back button
to return to soundinvesting.org). From that site you can download
the savings bond wizard. Then all you have to do is type in the
serial number and date of issue of your savings bonds and the
program gives back the current value, the interest earned, the date
of the next interest accrual, the yield to date and when the bond
will stop paying interest. The web site will also tell you what
rates (typically 4-6%) any savings bond currently pays as well as
how long they will stay in effect. This is essential information in
determining if your savings bonds are worth holding.
Currently, inflation adjusted
savings bonds may offer the best potential. Treasury Series I Bonds
offer a fixed yield adjusted annually for inflation. It should also
be noted that there are specific tax advantages with U.S. savings
bonds. They are exempt from state and local taxes and federal tax
liability in deferred until redeemed. If proceeds are used for
higher education purposes federal taxes may be avoided altogether -
one should consult with a tax advisor for specifics to your
The following is a list of
U.S. Savings bonds with 0% interest.
- Series E bonds issued in
June 1959 and earlier.
- Series E bonds issued
from December 1965 to June 1969.
- Series H bonds issued
from 1952 to June 1969.
- Savings Notes/ Freedom
Shares issued from May 1967 to June 1969. These bonds, issued
during the Vietnam War period, bear the words "Freedom Share"
and do not have a letter "E" after the serial number. The last
Freedom Shares will stop earning interest in October of 2000.
- All series A, B, C, D,
F, G, J and K bonds.
Series E Savings Bonds
revised their rules in 1965 and this has left many older bonds
earning no interest. Under the revision, Series E Bonds issued
through November, 1965 earn interest for 40 years. The bonds issued
in December, 1965 and later earn interest for 30 years. Latest data
suggests that there is more than $6.5 billion in savings bonds that
have not been cashed in and that are not paying interest. Many banks
no longer bother to train their employees in savings bond
management. In addition, the U.S. Government despite occasionally
switching rules, doesn't bother to send statements outlining your
holdings. Therefore, you must educate yourself to make sure you get
the most out of your savings bonds.
If you're not sure of the
status of a bond, look at the issue date on the upper right hand
corner. Any bonds issued from 1941 through October 1959 have stopped
paying interest, as have bonds issued from December 1965 through
October 1969. Interest rates depend on which bonds you bought, newly
purchased EE bonds earn a market-based rate equal to 90% of the
average of Treasury issues with five years left to maturity. The
rate, 4.31% as of October 1999, is reset every six months. Inflation
protected Series I Bonds, which we suggested and detailed above, now
pays 5.05%. One final suggestion when cashing in savings bonds,
calculate your total proceeds beforehand, just
to make sure your redemption check from the bank is full and
Savers Lack of Attention Incredibly Costly
According to the latest
Federal Reserve data, American Savers hold $1 trillion in low
yielding savings accounts that average 2.1% interest. Much
higher interest rates can be easily obtained from bank money
market deposit accounts, certificates of deposits (CD's) and
money market mutual funds. Yet savers continue to leave $30 -
$50 billion on the table each and every year by accepting of 2 -
3% and sometimes even less. In contrast, many Cod's of six
months or one year, and money market funds are currently paying
6 ½ - 7% or even slightly higher. The impact of this difference
over any significant length of time becomes truly amazing. At
2.1% the $1 trillion currently in such low paying savings would
be worth $2.3 trillion by 2040. The same amount invested at 7.1%
annually would yield $15.5 trillion - approximately seven times
more return for each saver's dollar.
Currently, approximately 7% of American households keep more
than $25,000 in these low paying savings accounts and about 43%
of them are 65 or older (the group that could most benefit from
obtaining higher rates). Over 15 years, that $25,000 could yield
$50 more a month even if were invested only at 6% compared to
its current 2.1% average. So make sure all your savings are
earning the appropriate safe returns - here is description of
your various options?
Bank Money Market Deposit Accounts: These offer FDIC
Insurance, total liquidity and as of December, 2000, average
yield in the 6% range.
Certificates of Deposit: Many banks and savings and loans
are currently offering around 7% for six or twelve months
guaranteed accounts which are also insured.
Money Market Mutual Funds: These funds are not guaranteed
by the FDIC but are privately backed by the mutual fund
industry, while it is possible to lose money, not one has ever
had the misfortune and it is unlikely if the fund is properly
managed. These funds offer liquidity, check writing privileges
and high interest that rises with the market.
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Treasury has 2 types of inflation adjusted securities offered to the
public. Though both serve to address the impact of inflation on fixed
income investments, the two have significantly different components and
MUST NOT be confused. The products are TIPs (Treasury
Inflation Protection Securities)
and I Bonds (Inflation adjusted savings bonds).
Generally, interest on such Treasury bonds are exempt from state and
local income taxes, but bonds are subject to other state and local taxes
as well as federal taxes.
What are TIPS?
TIPs are the Treasury's original Inflation Adjusted
securities. These bonds are coupon issues designed to reflect the
change in the rate of inflation (as measured by the CPI-U) to
protect the holder from loss of purchasing power (due to inflation)
during the life of the bond.
What are I BONDS?
I Bonds are the Treasury's inflation adjusted savings bond.
These bonds are zero coupon discount bonds sold in the same manner
as the traditional Series E & EE savings bonds. I Bonds
are available via banks and directly from the Treasury. These bonds
can earn interest for up to 30 years and interest earnings are
payable upon redemption.
How do TIPs Work?
Treasury auctions TIPs with a fixed coupon &
maturity just like traditional Treasury issues. The investor
receives semiannual interest payments on an inflation adjusted
principal. TIPs like traditional treasuries are
issued in minimum denominations of $1000 and can be liquidated at
any time. The REAL yield (as some refer to it) of
TIPs is the coupon rate PLUS the rate of
inflation. This allows the holder to maintain purchasing power
during periods of rising inflation.
Example: Client buys the 3 1/2% due 1/15/11 (current 10 Yr.
TIP) and inflation runs during the 1st 6
months @ 3.0%. Client receives 1st coupon payment of
$18.03 per bond (vs. $17.50 for the traditional treasury) as the
principal base has accredited to a value of $1,030.
How do I BONDS Work?
I bonds are issued with a fixed maturity and yield (based
on the purchase of a 30 year bond). The rate for I Bonds
is set on May 1 & Nov. 1 of each year. That rate applies to all I
Bonds offered during that 6 month period. I Bonds are
sold in various denominations from $50 to $5000. Also, I
Bonds redeemed within the first 5 years are subject to a 3
month earnings penalty.
What Happens To The Inflation-Adjusted Principal During the Term of
the TIPs Bond?
principal is adjusted daily by the CPI-U. During periods of
inflation, the principal value will accrete positively and would be
realized if sold prior to maturity. During deflationary periods, the
principal value will decrease and MAY cause interest
payments to be less than the stated coupon. However, bonds held to
maturity will return a minimum of par (regardless of deflation) and
would realize full inflation accretion.
What Happens To The Inflation-Adjusted Principal During the Term of
the I Bond?
current I Bonds will accrete at a rate of 3.00%
(current I Bond yield through 10/31/01) above the
rate of inflation. The treasury will re-set the yield every six
What Is The Tax Status of TIPs?
traditional Treasuries, income is exempt from state & local taxes.
However, the inflation accrual of the principal is subject to OID
and would be federally taxable in non-qualified accounts, even if
bonds have yet to be sold
(sometimes referred to as phantom income).
What Is The Tax Status of I BONDS?
one of the major differences between I Bonds &
TIPs. As with all savings bonds, tax liability is deferred
until the bonds mature or are redeemed. Many investors mistakenly
believe that TIPs also defer taxes. Clients
difference between the TIPs coupon notes & the
I Bond savings bonds.
What TIPs Issues Are Currently Available?
following issues are the 'current' outstanding TIPs:
3 3/8% 4/32 New 30 1/2 Yr. App. Yld. 3.40%*
3 1/2% 1/11 Current10 Yr. App.. Yld. 3.05%*
are also off the run TIPs notes (maturing between
2002 & 2010) and an off the run bond maturing in 2028 and 2029.
When Is The Next TIPs Auction?
Treasury has tentatively scheduled to auction 10 Yr. TIPs
more information regarding TIPs access the
Treasury's Website at:
more information on I Bonds access the Treasury's Website at:
How is I
Bonds interest determined?
interest rates have two parts:
fixed rate that lasts for 30 years
inflation rate that changes every six months
I bond fixed rates are determined each May 1
and November 1. Each fixed rate applies to all I bonds issued in the
six months following the rate determination. For example, a fixed
rate determined on May 1, 1999 applies to all I bonds issued from
May 1999 through October 1999.
|NOV 1, 2001
|MAY 1, 2001
|NOV 1, 2000
|MAY 1, 2000
|NOV 1, 1999
|MAY 1, 1999
|NOV 1, 1998
|SEP 1, 1998
The inflation rate is determined each
May 1 and November 1. It is the percentage change in the Consumer
Price Index for all Urban Consumers (CPI-U) over six months. Each
inflation rate applies to all outstanding I bonds for six months.
|NOV 1, 2001
|MAY 1, 2001
|NOV 1, 2000
|MAY 1, 2000
|NOV 1, 1999
|MAY 1, 1999
|NOV 1, 1998
|SEP 1, 1998
COMPOSITE EARNINGS RATES
We combine fixed rates and inflation
rates to determine composite earnings rates. An I bond's composite
earnings rate changes every six months after its issue date. For
example, the earnings rate for an I bond issued in March 1999
changes every March and September.
EARNINGS RATES THAT BONDS WILL BEGIN
NOV 2001 AND APR 2002
|NOV 2001 - APR 2002
|MAY 2001 - OCT 2001
|NOV 2000 - APR 2001
|MAY 2000 - OCT 2000
|NOV 1999 - APR 2000
|MAY 1999 - OCT 1999
|NOV 1998 - APR 1999
|SEP 1998 - OCT 1998
HOW WE SET COMPOSITE RATES
Here's how we set the composite rate
for I bonds issued Nov 2001 - Apr 2002:
Fixed rate = 2.00%
Inflation rate = 1.19%
Composite rate = [Fixed rate + 2 x
Inflation rate + (Inflation rate X Fixed rate)] X 100
Composite rate = [0.0200 + 2 x 0.0119 + (0.0119 X 0.0200)] X 100
Composite rate = [0.0200 + 0.0238 + 0.000238] X 100
Composite rate = [0.044038] X 100
Composite rate = 0.0440 X 100
Composite rate = 4.40%
For more on I Bonds and if they are
right for you click here.
Nine Steps to Raising Money-Smart Children
many things you can do and say to teach your children good money sense.
Having once been a child yourself, you can always fall back on stories
of how you used to earn, save, and spend money all those years ago. You
can fill their heads with sermons on how important it is to be careful
and wise with their money. However, the bottom line is that there's no
better teacher than experience. The key to teaching your children one of
the most important lessons of their lives is to have them learn by
are a handful of ways you can encourage your children to save and manage
money. In addition to the short-term benefit - namely, having children
who realize that money doesn't grow on trees - you'll be instilling in
them a healthy dose of financial responsibility that they can carry with
them through adulthood.
children interested in money early
children are very young (perhaps at age three or four), show them how to
tell different coins apart. Then give them a piggy bank they can use to
store up their change. A piggy bank (or even a wallet or a purse) is a
tangible place to keep their money safe. Using a clear bank is probably
best, as this will allow your child to hear, feel, and see the money
accumulating. This visual experience is the child's equivalent of an
adult reading the daily mutual fund prices in the newspaper or examining
a quarterly retirement plan statement.
saving has begun, let children spend money on treats, buying things both
when there are just a few coins in the bank and when it's completely
filled. This way, they will come to realize that a little bit in the
bank buys a small treat, but a full bank enables them to purchase
something special. Then, once they're a little older, try playing games
to help them understand the difference between "needs" and "wants." When
riding past billboards or watching television, for example, ask them to
identify whether each product advertised is a "need" or a "want." Tally
their score, and when they've accumulated enough points by guessing 10
or more correct answers, treat them to a "want."
saving a habit
children off on the right foot, make a house rule of saving 10% or more
of their income, whether the source of that income is earnings from a
neighborhood lemonade stand, their weekly allowance, or a part-time job.
If started early enough in the child's awareness of money, your plan
shouldn't run into much resistance. However, if you don't set some sort
of guidelines, chances are pretty slim that a child will take the
initiative and save on his or her own.
all you have to do is think back to when you were a child. Can you
honestly say you would have saved the money you received from a relative
on your eighth birthday without a parental directive to do so? Chances
are, you would have spent that money at the first candy shop you walked
by. Like any positive behavior you try to instill in your child, saving
money is a learned skill.
savings account in a child's name
piggy bank, a bank savings account can show kids how their money can
accumulate. It can also introduce them to the concept of how money can
make money on its own through compound interest. Start by giving your
child a compound interest table (available for the asking at most banks)
to let them anticipate how their money may grow.
Be sure to
plan regular visits to the bank. Although these days many people find it
easier to save via direct deposit, having your young child see you make
regular, faithful trips to the bank can shape his or her own saving
behavior. And, being able to participate in something a grownup does
will make any youngster feel mature and responsible. In case you haven't
noticed, children who accompany their parents to the bank invariably
want to "fill out" their own deposit slips. Why not do it for real?
Encourage goal setting
kids write down their "want" list, along with a deadline for obtaining
the items on the list. For example, your child may want inline skates by
the end of the summer, or a mountain bike by next year. Visualizing may
give kids the added motivation they need to save.
also contribute a matching amount every time they reach a certain dollar
amount in savings by themselves. Such a proposition sounds just as
appealing to a child as it would to you if your boss told you the
company would kick in a dollar for every dollar you saved over $10,000.
Not only will such an arrangement make them work harder to reach their
goals, it might also prevent them from thinking they'll be old and gray
before they save enough for an item on that wish list. After all, a year
is an eternity to a young child.
give kids experience with real-life money matters, letting them practice
how to save regularly, plan their spending, and be self reliant. Of
course, you should determine the amount of allowance you think fits
their age and the scope of their responsibilities.
parents feel they don't have to pay allowances because they generously
hand out money when their kids need it. But surveys have shown that kids
who got money from their parents as needed saved less and were broke
more often than children who earned allowances, even when the total
amounts children in each group received were the same.
you'll naturally decide for yourself when to start allowances and how
much to offer your children, consider the following guidelines:
grant too much independence by telling them they can spend their
allowances on whatever they wish. Make them save at least some of
it, and then advise them to spend the rest wisely.
take away allowances as punishment. Allowances are an educational
tool, not a disciplinary one.
Carefully consider raise requests, and discuss with a child why he
or she is making such a request. Spare yourself weekly petitions for
raises by telling your children they can only ask for raises twice a
year, and then stick to your rule.
reveal too much about your own finances when justifying reasons not
to grant a raise in allowance. Simply explain that your own budget
is limited, and that there is no extra money for a higher allowance.
be too generous. Too much money in a child's hands can breed
careless spending habits.
plan a budget
children write down what they'll buy during the week and how much each
item costs. Then write down their weekly incomes. If they don't match
up, they'll have to prioritize their "needs" and their "wants." To give
younger children practice making tough decisions, allow them just one
special treat - which they pick out themselves - at the grocery store.
Having to face 10 or more aisles knowing they can choose something from
only one helps children understand that spending means making choices.
Just as you know fixing a leaky roof might mean postponing your
Caribbean vacation, your children will realize that opting for an action
figure during a store visit means they won't be able to enjoy a candy
bar on the way home.
Encourage money-earning ventures
your children earn money beyond their weekly allowances, suggest to them
that they find creative ways to make money. Encourage them to do special
household chores, or to seek jobs in the neighborhood such as raking,
mowing, pet sitting, or shoveling snow.
in your neighborhood - particularly elderly residents - would love to
have a "regular" person doing things for them they can no longer do.
This is a perfect opportunity for your child to earn some money and to
do something for someone in need. Even though by the teen years, many
children begin earning money on their own by working part-time jobs,
continue to encourage that entrepreneurial spirit. To supplement his or
her income and help pay car insurance, for example, a teen might
consider starting a car pool to and from school and charging passengers
a nominal fee each week.
them the effects of inflation
your children how prices have risen over the years, take them to the
library to look up ads - for movie tickets, bikes, sneakers - in the
newspaper archives (try finding the year they were born). In addition to
being a trip down "memory lane" for you, it can serve as both a
financial awakening and a history lesson for your children.
with the knowledge that things will almost certainly rise in cost, your
children can use their math skills to see how much items they're saving
for will cost in the future. For example, a bike that costs $150 today
might cost $180 in five years, with 4% inflation. If they're old enough,
let them know there are ways to keep ahead of rising prices, such as
investing in mutual funds, which have historically grown faster than
inflation over time (although past performance is no guarantee of future
you should also tell them of the risks involved in investing. Let them
know that the value of mutual funds fluctuates over time, and that they
have just as good a chance of losing money as they do of earning money.
This will a) discourage them from thinking that investing is a sure
thing, and b) encourage wise spending.
investing may not hold any interest for them at this point in their
lives, it's important that they know such financial opportunities exist.
importantly, give them a head start
habits your children learn - and witness from mom and dad - will
certainly carry over into adulthood. While you may be proud of the
12-year-old who saves enough to buy a $400 bike, you might be even
prouder of the 22-year-old who can move into her first apartment without
having to ask mom and dad for a loan, or the 32-year-old who can draw on
his savings and investments to put a 30% down payment on his first home.
When those financial successes come, your son or daughter might even
turn to you and say, "Thanks, I owe it all to you."
ARE MUNICIPAL BONDS FOR YOU?
Over the past two years, the hardest-hit investors were those who
didn’t diversify and loaded up on technology stocks only to see
their portfolios downsized by NASDAQ’s market fluctuations. The
Diversification is key.
You can be better off the broader array of investments. For instance?
If you’re looking for portfolio diversification stability and income,
and you’re in the upper federal income tax brackets, consider municipal
bonds. They have quietly staged a comeback with a very respectable 11.5%
return in 2000 to go with their positive return in 2001 as well.
Why are municipal bonds such a good opportunity now?
New-issue volume is up nearly 40% over last year and all signs point
to this high volume continuing. And even more important, healthy
long-term tax-free yields remain relatively unchanged this year.
Meanwhile, comparable taxable bond yields have declined during the same
time, so when you look at municipal bonds next to taxable bonds, select
municipals are now a better value for the high tax bracketed investor.
Timing right for many investors.
And what’s more the past decade of economic growth has only
strengthened the financial positions of many municipal bond issuers. The
Relative strength in the municipal sector seems unlikely to slow in the
current economic climate.
What if you contrast municipal bonds to other types of bonds?
Despite credit downgrades in other bond markets, municipal bonds have
fared well with upgrades exceeding downgrades by 3 to 1 in 2000*. And
with inflation still in check, the Federal Reserve has considerable room
to reduce short-term rates in order to give the economy a jolt. This
pattern could reduce the risk of credit erosion for municipal bonds.
*Municipal Investor Monthly, March 2001
Advantages of Municipal Bonds.
That depends on what your investment objectives are. Even if tax-free
income isn’t a big consideration for you, individual municipal bonds
offer you three other important benefits:
- They’re safer. In fact, municipals are second only to
obligations of the federal government for continuous payment, and
have a much lower incidence of default than corporate bonds.
Investors should be selective and focus on insured AAA municipals
for added safety
- They’re diversified. You can choose from a large
inventory of Municipal bonds with a variety of maturities, ratings
and coupon rates, as well as issuers.
- They’re marketable. There is an active secondary market
for municipal bonds that lets you sell your bonds at current market
Still wondering if municipal bonds are for you?
Determine the yield you’d need to earn on a comparable taxable
investment. Since taxes change from year to year, you can use this
Municipal Bond Yield = Taxable Equivalent Yield
100% - % of Tax Bracket
Or think of it this way. If you earned 5% on your municipal bond (the
tax-exempt yield) and were in the 31% federal tax bracket, you need to
earn 7.25% on your taxable investment.
SAFETY OF MUNICIPAL BONDS
Tax free municipal bonds offer very competitive yields compared to
current CD's and money market funds on an after tax basis. Investors
must remain selective with muni's a with other bonds as they are not all
created equal nor are they safe.
Consider the $200 million in municipal development authority bonds
backed by Kmart rental payments that have fallen into default because of
the retail chain's bankruptcy. Or the United Airlines-backed bonds
floated to expand facilities at O'Hare International Airport, which
tanked after September 11. As a growing number of municipal bonds backed
by specific revenue streams become distressed, some muni bond experts
have begun to caution investors to stick to bonds backed by general
Even general obligation bonds are not as straightforward as they used to
be. Investors may be too overconfident in the companies that offer
municipal bond guarantees. Over half of all municipal bonds are now
backed by financial guarantees that confer AAA ratings, even when the
cities, states or agencies that issue them are rated below AAA.
Investors must realize that they are private companies, not government
agencies that are mandated to work in the public interest.
If the guarantors become unstable, the prices of the bonds they
guarantee could collapse. Such an event would catch retail investors and
many brokers alike by surprise. There are four companies that dominate
the financial guarantee market. They are MBIA, Ambac Financial Group,
Finance Security Assurance and Financial Guaranty Insurance (a unit of
GE Capital). A bond issuer can buy a guarantee, also called a wrap, from
any of these companies to raise their bond rating and reduce their
borrowing costs. In return for an annual fee during the life of the
bond, the financial guarantor, or wrapper, pledges to pay investors all
regularly scheduled principal and interest payments if the issuer cannot
meet its obligations.
The wrappers' stocks had a bumpy year in 2001. First, they were hit by
the California utility crisis. MBIA, the largest of the financial
guarantors measured by its insured portfolio, has a combined exposure of
$1 billion to Southern California Edison Company and Pacific Gas &
Electric. That's about 10 percent of the company's $10.1 billion in
claim-paying resources. Then came September 11. MBIA's exposure to New
York City is about $8 billion, and the company has an additional $15
billion in exposure to U.S. airports and airlines totaling more than two
times its reserves. Ambac puts its exposure to U.S. airports at $6.5
Totaling those numbers doesn't make any sense, says Dick Weil, MBIA vice
chairman. The way to look at our risk is to look at probability. Will
people really stop using airports? He notes that the company's losses
have historically been three basis points, or 0.03 percent, of its
guaranteed portfolio. He adds that MBIA's legal rights to payment exceed
that of other creditors. And even when MBIA must make claim payments, it
is often reimbursed. This was the case after MBIA paid investor claims
of $660,000 when Southern California Edison failed to make coupon
payments on two of its insured bonds in January 2001. MBIA anticipates
no losses because of either crisis.
Nonetheless, the terrorist attacks did trigger downgrades of several
bonds within the insurers' portfolios. Additional downgrades are likely,
though none have yet to be put on the watch list, says Jack Dorer, a
senior vice president at Moody's. However, he adds: "Further
deterioration in the airport bond sector, for example, could increase
the risk profile of the guarantors' portfolios."
Nonetheless other trouble spots could emerge within their portfolios.
Financial guarantors don't just specialize in municipal bonds anymore.
They have diversified, now offering guarantees for more complicated
structured corporate finance instruments and international debt. Smith
says the risk of default of bonds in these new businesses is likely to
be higher than in municipal bonds, where the default rate has been less
than 0.5 percent over the past 40 years.
It wouldn't even take the bankruptcy of one of the financial guarantors
to wreak havoc in the muni bond market. A simple downgrade to one notch
below AAA would serve as a wake-up call for investors who currently
assume that there is no risk in holding guaranteed municipal bonds. Such
a sudden change in perception would possibly trigger a steep decline in
Some advisors suggest that investors should apply the diversification
rule to their muni bond portfolios just as they should not load up on
bonds from any one issuer, their bonds should hold guarantees from a
variety of wrappers.
Patrick Early, manager of municipal bond research at A.G. Edwards, says
that if one financial guarantor finds itself in trouble, investors will
suddenly question all guarantors, and all wrapped bond prices will fall.
A downgrade would be a big psychological blow to the market, he says.
The reason so many bonds trade so freely is because the insurers have
homogenized the market. But a threat of a downgrade? I think that's a
In general most muni bonds are still sound investments for individual
investors. It's just the prices paid by many investors may be
All investments carry some risk, the role of the market is to assign a
price to that risk. Large institutional investors have long demanded a
small discount for guaranteed municipal bonds relative to AAA municipals
that do not require insurance to earn the top rating. The discount
reflects the notion that any risk, no matter how small, should be
reflected in a bond's price.
Many times individual investors are not always offered the same
The first obligation of advisors is to make sure that their clients
understand the risks involved in the bonds they buy. And their second
obligation is to make sure their clients are compensated for these
risks, however small.