Question: I was the owner of a high-interest municipal bond that was recalled to be replaced with a lower-interest issue. I was unaware of the recall until the last coupon was returned to my bank unpaid. When I asked my broker how such a situation could occur without her notifying me, I was informed this service is not provided if the owner has custody of the bond. She further observed that even if the bond was held by the firm it was doubtful an owner would be informed in view of the hundreds of bonds being recalled. If the broker doesn't provide this important service, to whom does the bond owner turn?

Answer: You really can't fault the broker for failure to notify you if you have taken custody of the bond. There is no way she would know if you still owned that particular bond or whether you had sold it through another broker.

On the other hand, I can't believe that the firm would fail to notify you if any bond held by them in your portfolio was called for early redemption. But let me explain how the system usually works.

When you deliver a bond to be held for you in street name, the broker does not physically maintain custody of the actual certificate you delivered.

Instead, your holdings are pooled with holdings of the same issue owned by other clients, each of whom is credited on the books of the broker with ownership of a specified amount of the particular issue.

If the entire issue is called, each owner would receive a transaction slip showing the redemption of the bond and the credit of cash to his or her account (or a check for the amount, if you don't leave cash in the account).

If there is a partial call, the broker usually determines the ratio of the call to the total value of that particular issue held for clients, then allocates the call to clients either on a proportional basis or--more likely--by a random lottery selection.

In a partial call, if your bond is not selected for redemption you will probably not be notified by the broker that a call had occurred. But if part or all of your holdings had been selected for turn-in, either by allocation or random choice, I am sure you would be notified by the broker.

To get back to your original question, I know of no fool-proof way to keep up with information on calls for your individual municipal bonds other than by watching the Weekly Bond Buyer you mentioned in your letter, or by default when you submit the next coupon for payment of interest.

Issuance of new municipal bonds in registered form--that is, with the name and address of owners registered by the issuer--instead of bearer form may resolve the question for the future.

Q: I loaned a friend $5,000 in January 1983 which was to be returned with interest in March 1983. To date I have not received payment and I suspect the money will never be returned. (I have a promissory note.) Can I claim a bad debt for federal income tax purposes on my 1983 return? What is the procedure?

A: Yes, you can claim a deduction for bad debt on your tax return. It goes on Schedule D as a short-term capital loss. Enter your friend's name, the date you made the loan, the date you determined the note was worthless, and the amount of money involved.

You may claim a tax deduction only for the $5,000 principal amount of the loan; do not include the loss of potential interest. (The annual allowable deduction for a net capital loss is limited to $3,000; the balance may be carried forward to the following year.)

In addition to the promissory note you should have some evidence of your bona fide attempts to collect the debt. I would suggest one or more letters requesting payment, sent registered mail with return receipt requested. At the very least you should have a log of the dates on which you verbally requested repayment.