Answers for Bond Owners

Some key questions California muni bond owners may have:

* What if I own muni bonds through mutual funds? Most likely, you have very little to worry about. Because the funds typically own diversified portfolios of bonds from around the state, even if some issuers default, the cost to a fund would probably be minor. What’s more, most funds employ researchers who track the finances of bond issuers and weed out bonds whose issuers appear troubled.

One measure of California muni bond funds’ health: From Jan. 1 to May 31, the average total return on California-only funds was 2.37%, according to fund-tracker Lipper Analytical Services. That was only slightly below the average 2.43% return of muni funds that own bonds from all states.

* What if my bonds are insured? That’s a big plus. Many cities, counties and school districts have paid to have their bonds backed by private insurance companies. If the issuer were to encounter financial trouble, the insurer would be obligated to make the payments.

Ironically, the bonds that most need insurance--those issued by the financially weakest municipalities--usually don’t have it because the issuer can’t afford it.

* Despite the fiscal problems in California, aren’t muni bond yields worth the risk because of the tax exemption?

In many cases, yes. You can earn 5% to 7% on long-term muni bonds now, depending on the issuer. Say you own a California bond paying 6%. In the 37% combined federal and state tax bracket (the top bracket), that 6% tax-exempt yield is the equivalent of a 9.5% taxable yield, such as on a bank CD. That’s almost impossible to match.

Even in lower tax brackets, muni yields still are extremely attractive compared to the alternatives. But remember: If you own the highest-yielding munis, they’re also probably the riskiest ones. Investors who bought such bonds years ago can no longer take them for granted. You should know exactly what you own, and whether there are serious concerns about the issuer’s future ability to pay.