SIE Exam - Section 5 Municipal Bonds
Ad Valorem Taxes
Property taxes
General Obligation (G.O.) Bonds
a common type of municipal bond. Support important projects for the city, state, or local areas that DON'T create revenue, such as schools, parks, roads, etc. Taxes are used to pay off. Full faith. Money is components of growing population, economic diversity, and municipal obligations.
Issuance of GO Bonds
1) Need 2) Hire financial advisors to advise on the current financial situation and structures 3) Municipal advisor structures new bond 4) Hire bond council to check legal aspects of bond and get legally mandated 5) Needs voter approval 6) Sold by the underwriter
Tax Free Equivalent Yield
Corporate Yield * (100% minus Tax Bracket). Show equivalence with the municipal bonds.
Each Bond Tax Status
Corporate: subject to federal, state, and local taxes (fully taxable). Municipal: subject to state and local taxes, but if the investor is resident of the municipality, can avoid state and local taxes. US territory bonds are considered municipality bond, US Government: subject to federal.
Municipal Bond Suitability
Investors must be high tax bracket. Also good for retirement plans.
Official Notice of Sale (Bond Buyer)
Underwriters look at The Bond Buyer, off how much they are willing to pay and issuer goes after the lowest cost one. City sells to the underwriter at firm basis.
Tax and Revenue Anticipation Notes (TRANs)
a combination of the above two. City wants to fund multiple projects but only issue one form of debt.
Bond Anticipation Notes (BANs)
issued prior to a long term bond issuance. If building a new high school, the city may issue BANs to pay for blueprints and land surveys.
Grant Anticipation Notes (GANs)
issued when a federal grant is expected.
Revenue Bonds
municipal bonds that support projects that make revenue, such as toll roads, airports, stadiums, zoos, etc.
Tax Anticipation Notes (TANs)
pay back borrowed funds with future tax collections. Example: renovate the park
Revenue Anticipation Notes (RANs)
pay back borrowed funds with revenue from the project. Example: expand the zoo
Feasibility Test
see if revenue bonds actually make money. Revenues will pay off bonds and no voter approval and debt limits.
Notes
short term municipality bond, ranging from 3 months to 3 years.
Limited Tax Bond
type of GO bond that only has access to a predetermined amount of taxes. Risk is increased for bondholders as the issuer can't increase taxes if they face financial difficulties.
Variable Rate Demand Notes (Variable Rate Demand Obligations)
variable rate bond with a put option. On set schedule, the note resets its interest rate to the current market interest rate.