Bonds

[geekgirldany]

I do not give advice on what a customer should invest in. I will recommend a IRA, 401K, etc needs to setup but beyond that I don't offer other investment advice.

This brings me to my question. I have a customer that is investing in a bond for a power company. He is putting a large amount into it $80,000. His investment advisor said it would be earning interest tax free. I think it will be tied up for 5 years.

I was listening to one of those radio talk show folk and he talked like it was not a good time to invest in bonds.

I would appreicate if anyone could shed some light on this. I feel like this is alot of money for him to put into one investment. If I can help him go another way possibly another investment advisor I would like to.

Thank you for any advice.

[Snaggletooth]

Talk Show Bunk

is an opinion, just like you would get anywhere else. Tax-free investments are appropriate for some people, but not for everyone. These bonds will earn very low interest, but if your client is in a high tax bracket, he might have a return just as high. Plus if you are in Georgia, if the municipality is in Georgia, the interest will be tax free for state purposes as well. Most of them are safe.

Please note the effect of 1040, line 8b, on the taxable Social Security calculation.

Almost any talk radio show has enough element of truth to sound good, but most of the famous hosts never invite anyone on their show who has an opposing opinion, and even if they do, they control the cut-off switch. I would value their investment opinions as neither accurate nor inaccurate, and would definitely not talk a client into getting rid of their broker based on anything I heard on the airwaves.

Not tax-related, but one of the most famous talk-show incidents was in Detroit, where former NFL tackle Matt Millen called in. The owner of the NFL Detroit Lions happened to be listening and was so impressed he hired Millen to be President of the football club. After eight years and setting all-time NFL records for losing, Mr. Millen was fired Sept 24 by the same owner. Both Millen and the owner have horrendous histories with the team.

[BOB W]

Two years ago I went 100% into Fidelity's NYS Tax free AMT bonds. Guess what?, I have all my money... I was not concerned about growth, just preservation of principle and AMT problems. My most recent statement has shown an increase in interest earnings...how come???

[FEDUKE404]

One possibility

Two years ago I went 100% into Fidelity's NYS Tax free AMT bonds. Guess what?, I have all my money... I was not concerned about growth, just preservation of principle and AMT problems. My most recent statement has shown an increase in interest earnings...how come???

My best guess would be there is some capital gains aspect from sale of appreciated bonds in your recent "interest earnings."

And a question for the original poster: Are you talking about "tax-free interest" or a (possibly mistaken) payout of all taxable interest at maturity of the bond? Be sure there is not going to be an annual income component over those five years!

And in today's interest environment, a five-year bond could really crash (loss of principal) unless you honestly think interest rates will remain at their current very depressed levels!

FE

[geekgirldany]

Thank you all for responding.

The bond is with GA Power. Here is the info on it:
Coupon 5.75%
Maturity 10/01/32
Price 100
YTM 5.75% Features:* Tax-Free: Interest is free from federal and Georgia state income tax.

Customer told me the investment person said if he did not get 5.75% he would be guaranteed to get back his principal/purchase price. Basically get back the money he put in it. After what has been said here and what I have read at this website http://www.investinginbonds.com/lear...catid=3&id=383
I don't think that is true.

Customer asked me about this last week. I told him then he could invest some. I did not even think that he would do $85,000 as he has always been so reluctant to let his money go. He then called today about how to write the check out.

Snag, yeah I know on the radio guys. I listen to Dave Ramsey. He says to invest in Roth IRAs and growth mutual funds with a long track record. A lady called him today about bonds saying that her investment person was wanting her to transfer her money over into bonds. He told her now was not the time.

[FEDUKE404]

More on bond

(I could not get the PDF file to open on the E. Jones web page.)

Avoiding the "advice" route, here are some issues to consider:

1) He would get his principal back at time of maturity....a long way off! If interest rates rise, and he wanted to sell the bond on the open market before maturity date, the bond would probably be sold at a discount.

2) The bond is callable @100% (par) starting in 2013. That nice interest could disappear prematurely.

3) If the guy is not a resident of GA, he would be subject to state income tax on the earnings.

4) AMT information on the bond is not available - could that be a factor for him?

5) As mentioned by others, the taxable amount of any Soc Sec benefits could be increased as a result of this "tax-free" income.

Other than that, just think how far down the road 2032 is......and of course look into the underlying strength of the bond issuer.

Good luck!

FE

[geekgirldany]

Thanks so much!

I sent him an email asking him to hold off until I can talk to him more about it.

Yes AMT could possibly be a factor for him. He is doing very well in his business.

So he can call it at 2013 but to get a real value out of the bond it should be held 20 to 30 years? I just want to understand correctly.

Also doesn't a person's investments need to be more "diversified"? Say not just putting it into one bond but maybe several municipal bonds?

[FEDUKE404]

More research is needed for any decision

I sent him an email asking him to hold off until I can talk to him more about it.

Yes AMT could possibly be a factor for him. He is doing very well in his business.

So he can call it at 2013 but to get a real value out of the bond it should be held 20 to 30 years? I just want to understand correctly.

Also doesn't a person's investments need to be more "diversified"? Say not just putting it into one bond but maybe several municipal bonds?

Since this is primarily a tax board, some of your questions are a bit outside of the normal discussions here. Having said that, here are brief answers to help you:

1 - There may or may not be an AMT component to the bond interest. The bond issuer/prospectus could resolve that question. I could not get the PDF file referenced here ( http://www.edwardjones.com/en_US/res...WEB043529.html ) to open.

2 - The bond owner has nothing to do with a bond being called. The only two choices are hold to date of maturity (or being called) or sell on the open market beforehand at a discount/premium. The call provision allows the bond issuer to essentially cancel the bond at a date before the established maturity date. The call provision on this bond is 100% (no premium) in 06/2013. Were such to occur, your client would see his anticipated 5.75% income cease prior to 2032 and then would have to look elsewhere. Due to disruption of anticipated cash flow, some investors simply avoid all bonds that can be called, unless perhaps a premium (105% or 110%) is in place for their "trouble."

3 - Diversification is always a wise move, BUT such decisions should be left to the client and those who are qualified to offer such advice related to investments.

Good luck, once again!

FE

[sea-tax]

Geek while a single issue bond does carry some inherent risk, I will let you know that even unrated municipal bonds carry a default risk of less than 1%. The most notable bond that defaulted lately was Venture County California, even with default a majority of bond holders were made whole with in three years.

While I am not familiar with the bond your client wants and am in no way offering advice as to the validity of the investment choice. I have heard of worse ideas.

[Snaggletooth]

Georgia Power

Georgia Power Co is a huge utility licensed to provide electricity for the entire state of Georgia, with the exception of some REA communities. In fact, chances are overwhelming that the GeekGirl cuts a check to these people every month.

5.75% is unusually high for a tax-free bond. I don't understand why they are having to pay that much. Callable? For a high rate like this, I would think so.

My father's banker talked him into buying a $20,000 Tennessee 7.75% tax free bond with a fifteen year maturity. This was back in the hyper-inflation of the Carter years, and this kind of rate was not unusual. He boasted about getting that kind of money for a few years. The municipality eventually was able to issue bonds much, much cheaper, and when they had sold enough of them around 3.0%, they called in Dad's bond and sent him a check for $20,000. He was furious. Remember, this will only happen when they can find cheaper money. If money becomes more expensive, the bond-holder is stuck with it.
A "callable" bond is strictly at the option of the issuer.

[geekgirldany]

Thank you all for taking the time to respond. I know my question really isn't about taxes directly so I appreicate your help.

Ga Power is a huge company and the possiblities of them not paying is very low. I guess I just want to look out for my customer as that seems so much to invest. I'll leave it up to him and the person who is advising him on the investments.

I think it is time I take some classes on investments to increase my knowledge on that side of things more.

I was talking to a relative the other day about questions I get that directly or indirectly involve investments, mortgages, etc. He told me that I may have the best of intentions and try to help a person out by researching, etc... but if I don't known anything about it or know that I can not help them... then tell them that so they can find someone that can.

Thank you all again for your help.