Municipal Bonds

Coupon Rates

As a general rule, municipal bonds with longer time to maturity have higher _____________ __________.

Muni Bond

Bond issued by a local government or territory, or one of their agencies. It is generally used to finance public projects such as roads, schools, airports and seaports, and infrastructure-related repairs.

Underwriter

Broker-dealer that publicly administers the issuance and distributes the bonds. As such, they serve as the bridge between the buy and sell side of the bond issuance process. Connect issuers with potential bond buyers, and determine the price at which to offer the bonds.

Rc = Rm / (1 - t)

Formula for interest rate of comparable corporate bond

Rm = Rc (1 - t)

Formula for interest rate of municipal bond

t = 1 - (Rm/Rc)

Formula for tax rate

least liquid

Historically, municipal bonds have been one of the ___________ ___________ assets on the market.

6.2%

If the interest rate of a comparable corporate bond is 10% and the tax rate is 38%, what is the interest rate of the municipal bond?

38%

If the interest rate of a municipal bond is 6.2% and the interest rate of a comparable corporate bond is 10%, what is the tax rate?

10%

If the interest rate of a municipal bond is 6.2% and the tax rate is 38%, what is the interest rate of the comparable corporate bond?

Rc

Interest rate of comparable corporate bond

Rm

Interest rate of municipal bond

Bond Holder (individual & syndicate)

May purchase bonds either from the issuer or broker at the time of issuance, or from other bond holders at some time after issuance. In exchange for an upfront investment of capital, the bond holder receives payments over time composed of interest on the invested principal, and a return of the invested principal itself.

Muni Advisor

Obligated to represent the interests of the issuer and serve as a source of financial advice. This entails offering advice on structuring, selling, and promoting bonds, as well as serving as the central liaison between other members of the financial team, especially the underwriters and credit rating agency.

tax exempt income

One of the primary reasons municipal bonds are considered separately from other types of bonds is their special ability to provide ______ _____________ ____________.

States, cities, counties, redev agen, school districts

Potential issuers of municipal bonds

Rev Bonds

Principal and interest are secured by revenues derived from tolls, charges or rents from the facility built with the proceeds of the bond issue. Public projects financed by revenue bonds include toll roads, bridges, airports, water and sewage treatment facilities, hospitals and subsidized housing. Many of these bonds are issued by special authorities created for that particular purpose.

Gen Ob Bonds

Principal and interest are secured by the full faith and credit of the issuer and usually supported by either the issuer's unlimited or limited taxing power. In many cases, these bonds are voter-approved.

Assess Bonds

Promise repayment based on property tax assessments of properties located within the issuer's boundaries.

Rev Bonds (risk)

Promise repayment from a specified stream of future income, such as income generated by a water utility from payments by customers.

Gen Ob Bonds (risk)

Promise to repay based on the full faith and credit of the issuer; these bonds are typically considered the most secure type of municipal bond, and therefore carry the lowest interest rate.

Muni Issuers

Public agencies raising money through bonds—such as states, cities, and counties

Bond Counsel

Syndicate of legal professionals

t

Tax rate

Build America Bond

Taxable municipal bond created under the American Recovery and Reinvestment Act of 2009 that carry special tax credits and federal subsidies for either the bond holder or the bond issuer.

Brokers

The intermediate step between the underwriter and the actual bond holders, the cement-and-pavement financial professionals who answer orders for bond purchases. Seeks to distribute their bonds from the underwriter at a small percentage profit.

Interest income, gross income, state income

____________ ___________ received by holders of municipal bonds is often excludable from ____________ ___________ for federal income tax purposes and may be exempt from ____________ ___________ tax as well.