What is the difference between current yield and yield to maturity?

Simply speaking, current yield reflects what your bond assets are paying while yield to maturity indicates what they are earning. Current yield reflects the cash flow received from your investment and is a function of the coupon of the bond and the market price of the bond. For example a $1,000 par value bond with a coupon of 5% pays $50 in annual coupon income. If the bond was purchased at a price of $90, the current yield is 5.55% (50/900.) The yield to maturity is the annual rate of return that is anticipated over the life of the investment and includes amortization of any premium or accretion of any discount from par, coupon payments and reinvestment of the coupons. An important assumption in the determination of this return, however, is that the rate at which the coupons are reinvested is at the yield to maturity rate.

What is duration and why is it so important to understand?

Duration, in layman's terms, is a mathematical calculation that quantifies the principal risk of a portfolio for a given change of interest rates. It is an important concept to understand for two main reasons: first, because duration ultimately determines the price volatility of a bond and a bond portfolio, and second, because it can help establish a client's tolerance for risk. For example, a bond with a duration of 5 will experience an approximate 5% price change for a 100 basis point (1%) change in rates. The bond's price will increase by this amount when rates decline and fall when rates rise. A bond duration is affected by its maturity and coupon and by the prevailing level of market interest rates as shown below: 3% YTM   5 Yr Maturity 10 Yr 20 Yr 3% Coupon 4.68 8.58 14.96 5% Coupon 4.45 8.05 13.62 7% Coupon 4.31 7.65 12.78 5% YTM   5 Yr Maturity 10 Yr 20 Yr 3% Coupon 4.55 8.57 13.94 5% Coupon 4.38 7.79 12.55 7% Coupon 4.23 7.38 11.72 7% YTM   5 Yr Maturity 10 Yr 20 Yr 3% Coupon 4.49 8.13 12.86 5% Coupon 4.31 7.53 11.47 7% Coupon 4.16 7.11 10.68

Why is a bond manager's investment style important to understand?

There are three basic investment styles: aggressive, neutral and defensive. Aggressive managers tend to extend portfolio duration's and accept lower credit quality. They typically perform well in bull markets and poorly in bear markets. Defensive managers significantly restrict portfolio duration and tend to perform very well in bear markets and poorly in bull markets. Neutral managers structure portfolios with moderate duration risk and tend to provide average returns in both bull and bear markets. C.W. Henderson is a defensively styled money manager.

Are all AAA rated insured municipals bonds the same?

Absolutely not! One must consider the following issues when evaluating the relative attractiveness of insured municipal bonds: the creditworthiness of the underlying issuer of the bond, the creditworthiness of the bond insurer and the liquidity associated with each individual bond. Although Aa rated General Obligation (GO), A rated Water and Sewer Revenue, Baa rated Hospital and Non-rated Nursing Home bonds all may be rated Aaa due to bond insurance, each insured bond trades differently in the secondary market based on the credit quality of the issuer, irrespective of insurance. For example, a Aa rated GO almost always trades better than a non-rated nursing home bond, even if they both are rated Aaa due to insurance.

What is a "specialty state" bond?

Interest generated by a "specialty state" bond is exempt from state income tax (as well as federal tax) if the owner of the bond is a resident of the same state as the issuer of the bond. State taxes can often be significant for holders of "out of state" municipal securities. The following are examples of "specialty states": CA, CT, GA, MN, MT, NJ, NY and NC. In contrast, deductibility of "in state" income is not applicable to residents of Alaska, Illinois, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

In the context of the municipal bond market, what is active management and how does it differ from the more traditional passive "buy and hold" approach?

Active management is a value based approach to investing in municipal bonds that is grounded in the following premise: a swap should occur any time it is possible to sell one municipal bond and replace it with another municipal bond that improves the overall value of the client's portfolio on an after-tax basis.

What are the benefits of using a fee-only, actively managed investment advisor versus using a traditional broker to manage a portfolio of municipal bonds?

A fee-only investment advisor should add more value to a municipal bond portfolio than a traditional broker for the following reasons: Selfishly speaking, fee-only investment advisors only incentive is to enhance the value of their clients portfolios so as to increase fee revenues. Brokers are often conflicted with their clients best interest and the need to generate commission revenues. Most, if not all, brokers do not actively manage portfolios, but take a simple buy and hold approach. Most fee-only investment advisors employ active management which, if based on relative value analysis, usually outperforms the "buy and hold" approach of traditional brokers. The majority of traditional brokers lack expertise in the arcane $1.3 trillion municipal bond market. A fee-only investment advisor is constantly monitoring the holdings in client portfolios, since the advisor is attempting to create value relative to an agreed upon market benchmark. Most brokers sell bonds from their inventory only, often ignoring better bonds that are offered by other firms.