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On money

When 'call' is made, be prepared to answer

By HELEN HUNTLEY
Published March 13, 2005

If your broker starts talking about a "call," you'd better hope it's the social kind.

Whether you're a conservative income investor or the daring type who buys securities on the margin, "call" is a four-letter word. If you want to reduce your chances of hearing it, take time to understand how a call could affect the investments you make.

Bonds and preferred stocks often are issued with a call feature. This spells out the conditions under which the issuer can redeem the security. Look for a date that tells you when it can be redeemed and an amount, whether it's at face value or at a small premium to face value. If an issue is described as "noncallable," then it cannot be redeemed before its maturity date.

Why does it matter? Because in today's low-interest-rate environment, many fixed-income securities sell at a premium to face value. For example, you might pay $1,100 for a $1,000 bond paying above-market interest. If you are able to hold the bond to maturity, the higher interest payments you collect over the years will offset the $100 loss at redemption. But if the bond is called soon after you buy it, you have a $100 loss and no interest payments.

New York City recently shocked investors when it began early redemptions of $430-million of municipal bonds. The bonds dropped about $50-million in market value as a consequence, according to some brokers' estimates. Even some sophisticated money managers were caught by surprise. They knew about the call provisions but didn't expect them to be used.

The hard-earned lesson is that it pays to be super cautious when buying a bond or preferred stock for more than its face value. Ask about the call provisions - your broker is required to disclose them - and ask about the "yield to call," based on the earliest redemption date and price.

If you are a margin investor - buying stocks with borrowed money - you need to know your broker's rules for the other kind of call. Margin calls are notices that you need to add cash to your brokerage account or some of your securities will be sold. You can find the rules in the margin agreement customers are asked to sign.

The general rule is that you can borrow up to half the cost of a security. Once you own it, you must not allow your equity (the account value after subtracting what you owe the brokerage) to slip below a certain level. The industry minimum is 25 percent of the securities' value, but many brokerages have higher requirements.

If your account drops below the required level, you'll usually get a phone call giving you the opportunity to deposit cash in your account. However, your broker probably retains the right to sell the securities in your account without notice if your equity falls below a certain point.

If you think that sounds risky, you are right. Margin investing magnifies the opportunity for gains and losses.

I want to file a joint tax return, but my husband owes back taxes. I'm told there is a form I can fill out and my tax refund will not be withheld since I was not married to him during these tax years that he owes. What is it?

The form you've heard about is Form 8379, "Injured Spouse Claim and Allocation." It allows you to get your share of a refund even though your husband's share would be withheld by the IRS. You use the form to allocate income, exemptions, deductions, credits, etc. between the two of you.

I also recommend calculating your taxes as "married, filing separately." If the additional tax burden is not too great, it might be worthwhile to file separately. In addition, you both should change your withholding so you don't get a refund. Then you won't have to worry about this in the future.

I plan to move to Florida in about two to three years. I have a house in New York that I rented and that is fully depreciated. If I move there and reside for at least two years could I sell the house without paying capital gain taxes?

You would be able to exclude part of your gain from taxes, but not all of it. You cannot exclude the part equal to any depreciation allowed as a deduction after May 6, 1997.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified March 22, 2005, 16:33:04]