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The topic of this week’s Mullooly Asset Management podcast came from an industry newsletter we recently read here in the office. You can check out the post here (http://www.investmentnews.com/article/20140422/FREE/140429982). The article is centered around a recent uptrend in arbitration cases filed to Finra in the first quarter of 2014. Many of these cases have been filed as a result of the collapse seen in Puerto Rican municipal bond funds. Tom and Brendan discuss these municipal bonds and have quick reminder about debt securities for listeners.
As you may know, municipal bonds are exempt from federal taxes. In most instances, they are also exempt from state/local taxes if you live in the state that issued them. Puerto Rican municipal bonds are tax-free in every state in the US. This makes them very popular among individual investors and municipal bond funds. A lot of these bonds were AAA rated at a time and some were even insured.
Recently, Puerto Rico has been openly discussing the possbility of filing bankruptcy, and the value of their tax-free bonds have been dropping.
Tom and Brendan saw this situation as a perfect opportunity to remind listeners of some basic things they should remember about debt securities.
Although you may invest in a AAA rated bond (like these Puerto Rican municipal bonds were at one point), that does NOT mean the credit raiting cannot change many times over its duration. Changes in credit rating can affect the current value of bonds. If your plan is to hold a bond until maturity, then credit ratings will not matter much to you. However, if the entity issuing a bond files bankruptcy your money will be at risk, regardless of what rating the bond held when you purhased it. These are not risk-free investments.
These are all good things to remember when considering bonds for your portfolio. These are also all great things to discuss with your investment advisor before deciding to buy or sell any type of investment.
Tune into this week’s podcast to hear the full discussion!