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Dear Mr. Berko:

Dear B.E.:

The BlackRock Municipal Bond Trust (BBK-$15.13) went public in April 2002 at $15 a share with a dividend of 8.4 cents a month, tax-free of course. It briefly dipped below $15, then zoomed beyond $19 for a short time during the market euphoria in mid-2007.

The monthly dividend has been consistent during the past six years with an occasional downward adjustment when (leveraging) borrowing costs got a little tight. The price is still $15 a share; however, the dividend began dropping again last September about six months after the subprime fiasco began to fester. Yes, the 7.65-cent monthly dividend yields 6.07 percent, and in the 30 percent bracket it’s equivalent to an 8.67 percent taxable return. That’s not too shabby, and my barber, who is as cynical as Diogenes, also owns this closed-end fund. Last September he proudly pointed out to me that 90 percent of this BBK portfolio has a maturity of 12 years or longer, which he thinks assures him that the current payout will remain constant for the next decade. Well, maybe not, but I don’t want to disabuse him of that opinion while he’s holding the razor.

Yes, the BBK lads use leverage, but they’re reluctant to make a big deal of it. Now sit back and read on, and I’ll tell you how they do it.

When BBK went public in 2002, the company raised $100 million, which was immediately invested at 5.5 percent to produce $5.5 million in tax-free income. But those nice BlackRock boys don’t work for the Salvation Army; they insist on being paid for their hard work, so they charge a hefty management fee of 0.83 percent to cover club dues, legal, accounting, travel, entertainment, golf lessons, personal trainers, tennis camp, postage and printing, theater tickets, etc. But that 0.83 percent charge reduces BBK’s interest income by $830,000 so that the net nontaxable income to share holders is $5.5 million less $830,000, or $4.67 million. That’s only a 4.67 percent yield, and even though it’s tax-free, it wouldn’t butter many bagels in Bethlehem.

So the boys at BBK borrowed $55 million in the short-term credit markets and invested that $55 million, also at 5.5 percent, increasing the portfolio’s gross income to $8.52 billion. This $55 million loan cost BBK 2.2 percent, or $1.21 million, which is deducted from $8.52 million so that the BBK portfolio has a gross income of $7.31 million. Then they subtract their 0.83 percent management fee (which is now 0.83 percent of $155 million, or $1.28 million) from $7.31 million, providing investors with a net income of $6.03 million. On the shareholders’ initial investment of $100 million that’s a tax-free yield of 6.03 percent.

I think the BlackRock folks do a modest job of running their myriad closed-end funds from their plush East 52nd Street offices in New York. But in this climate, I would not be comfortable owning BBK even with that 6.07 percent tax-free return. The BlackRock funds rely heavily on short-term borrowed money to enhance their returns, high enough to pay themselves a hugely substantial management fee. However, even though BBK has an outrageous 0.83 percent management fee, even though it trades at a 4.1 percent premium and even though it uses leverage, I think your broker may have selected one of the best for you.

The share price and dividend record has remained virtually intact since inception, which suggests that management has earned its fee and that your broker is on his toes. But your broker should be able to clearly explain the concept of leverage to you, so give him a copy of this column.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service