You really want to get more for your bonds on a net basis than what they are worth in the true marketplace. It’s as though you go to a bullion coin dealer and buy a silver eagle at $7.75 a coin with bullion at $5.50 an ounce. Now you want to sell it. The dealer won't buy at the spread he sold them to you. The bond dealer has to think of carrying the bonds until he can resell them. He is taking on a risk depending upon the names and marketability. But they are still bits and pieces. Is it more costly for a dealer to process orders for 20 or 30 or more names or does it cost less to process one order for 300 bonds? There may be collectors that will buy odd lots and try to make round lots out of them.
Don't worry about getting the last nickel or dime. Talk to a couple of brokers or financial consultants to determine the least expensive exit strategy.
I bought a municipal bond several years ago from the Knoxville, Tenn. housing development authority. About 3 years after the bond came out; I got a letter from my broker saying that the IRS had ruled that this bond was NOT exempt from taxes. How could this be? How can I avoid getting caught like that again?
You say: "How could this be? In regard to a bond that you thought provided tax-exempt interest but was found not to.
Just because a bond is sold and is said to be free from federal income taxes doesn't mean that it is. Many times the use of the proceeds of the bond issue is clouded and it takes time for the IRS to rule on the matter. The proper structuring of transactions by local and state governments enables muni bond investors to take advantage of the tax-exempt nature of the interest. If the transaction is not structured properly within the limits of the law, the interest received can be deemed to be taxable, as in your case. Over the years the federal tax authorities have curtailed the tax advantages of interest received from transactions deemed not to be in compliance with the law, often in the case where the proceeds are invested in "tax arbitrage" activities. These may involve the investment of the proceeds from some of these transactions in higher yielding taxable securities with the result the issuing body gets the difference between the higher yield on the investments and the cost of the interest on the new debt.
There are also taxable municipals for which the interest is taxable income according to the Internal Revenue Service. These are often securities issued for purposes that have less governmental involvement than previously and thus are not eligible for tax exemption, or that exceeded the bounds or limitations placed on those activities by the federal tax code.
But there are several basic or fundamental questions you should ask yourself before you go off on a tangent. Did you really know the Knoxville or Memphis or other broker involved in the transaction? Where did you get the information concerning the tax-exempt status? Was the legal opinion from the municipal bond attorney or the tax lawyer hedged in any way or was it clear-cut? Did the attorney have a good reputation or was it from a fly-by-night outfit similar to the bond dealer?
Just as there is a rule for brokers to "Know their customers," the reverse is also apropos, How well do you know this broker? Will he make a settlement (assuming he is still in business and can be located)? Did you sit down and study the offering memorandum? Were you enticed by the above average yield?
I think that perhaps you were also a party to this deception. Did you really do your due diligence? Don't forget (was it B. T. Barnum who said it?) that "there is a sucker born every day and two to take him" or something to that effect.
What is your opinion on Floating Rate Municipal Bonds? I hear they are a good source of tax-exempt income?
Floating rate bonds certainly have a place in many bond portfolios. A floating rate security provides an interest rate that varies from time to time and is usually based on some benchmark interest rate. Some have interest coupons that reset daily and others reset weekly, monthly, quarterly and even over longer periods. Some issues have floating rate coupons that can turn into fixed rates under certain circumstances. In some cases, the investor is allowed to put the bond back to the issuer for redemption at par; in other cases an investment banker will undertake to remarket the bond for the investor or issuer. Just because the interest rate floats doesn't imply that the bond's price will stay around the par level. Some floaters have been known to sink.
Floaters can be appealing when interest rates are low because they ought to reset at higher levels as interest rates rise. When rates are high is the time investors want to lock in yields.
Make sure that the details of any offering are FULLY explained to you. Don't forget to get call, sinking fund, put provisions. Check to see how and when the interest coupon is determined. Are there any floors below which the rate cannot go? Is there a ceiling which caps the rate? Of course, you want to know the rating of the bond. What has been the rating history? Is the issuer improving or is the issuer getting weaker and less credit worthy?
Some bond salesmen may think that investors ask too much but isn't it better to know before hand all the information on which to base a decision? If your broker cannot or will not provide you with proper and good service, perhaps it is time to switch.
What are the best highest yield very safe tax-free 1 to 2 year bonds today?
If you want a tax-free bond that is safe in terms of credit quality and with a high yield, my best suggestion would be a AAA or AA rated State General Obligation (GO) bond, insured bonds. GO's are defined as municipal bonds backed by the full faith and credit (taxing and borrowing power) of the municipality issuing the bonds.
Current yields are as follows:
1 yr. 2yr.
AAA 2.50 2.70
AA 2.60 2.80
I would suggest you contact your broker for more information on specific bonds.
Treasury Bonds http://www.bondsonline.com/asp/research/faqtreas.asp