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URL:  http://boards.fool.com/this-post-contains-answers-to-jgc123-and-30418218.aspx

Subject:  Re: Municipal bonds: A train wreck waiting to ha Date:  12/6/2012  9:11 PM
Author:  yodaorange Number:  410703 of 502961

This post contains answers to Jgc123 and Crackdclaw.


Jgc123 asked: How do you research muni funds? My Dad has a chunk of PRVAX which provides tax free income at about 3.6% and I can't figure out how to research the relative risks of the individual holdings.

Jgc, I do not know of an easy way to answer this question. I went and downloaded the latest holdings in the fund. Unfortunately, they do NOT list the “CUSIP” for each bond. You have to find that yourself. I did that for several of the larger holdings and found that the bonds are callable early. For example one large holding is:

METROPOLITAN WASH D C ARPTS AUTH ARPT SYS REV AIRPORT SYS REV BDS
CUSIP 592646T52
Matures 10/1/2039
Callable at 10/1/20 @ 100
Currently Valued at 113.9
5.0% coupon

I would not attempt to judge whether this bond will be called in 2020 or not. If it is called, the fund will obviously lose the extra 19 years of a 5% yielding bond.

I do not know if Morningstar does this kind of analysis or not when they review a bond fund. I thought they mostly went off of past performance. Let me hypothesize two different funds

a) Muni fund A currently yields 4%, has a duration of 7 years and contains only bonds that are NOT callable. Credit quality = XYZ

b) Muni fund B currently yields 4%, has a duration of 7 years and contains only that ARE callable