Section 8, Municipal Bonds

Municipal Bonds are issued by

State and local government entities such as cities, counties, school districts, authorities, and the state itself.

What are the tax benefits of a municipal bonds?

Interest is exempt from the federal income tax AND may also be exempt form state and local income taxes

What are General Obligations (GO) bonds?

Bonds backed by the full faith and credit of the issuing municipality secured by taxes collected by the municipal and usually require voter approval.

What secures the principal and interest Payments on General Obligation Bonds?

Taxes collected by the issuing municipality.

Revenue Bonds

Bonds for which interest and principal payments depend on revenues form a specific facility (e.g. toll toad or bridge), not on taxes

Revenue Bonds are popular

a. The don't require a citizen vote
b. the don't count toward constitutional/statutory municipal debt limits
C. they aren't payable from taxes and wont cause tax increases

Industrial Development Bonds

Bonds sold by a municipality on behalf of a corporation to finance facilities purchased or leased by that corporation

Who ultimately pays interest and principal on industrial Development Bonds?

The company or corporation using the facilities.

what is the tax status for companies that benefit from Industrial Development Bonds?

Substantial users may be taxed on interest if they purchase the bonds

Taxable Equivalent Yields

Compares returns on corporate bonds vs municipal bonds by adjusting for taxes.

Corporate Equivalent Yield (Formula)

Municipal Yield
———————
(100% - Investor's Tax Rate)

Municipal Equivalent Yield (Formula)

Corporate Yield x (100% - Investor's Tax Rate)

Alternative Minimum Tax (ATM)

A tax designated to ensure wealthy individuals, trust, estates, and corporations pay some income tax.

What items can ATM Apply relate to Municipal bonds?

Tax Preference" item like municipal bonds issued for private industry projects (e.g., waste management companies)

Official Statement (OS)

A disclosure document similar to a prospectus, containing detailed financial info on a new issue of municipal bonds. Provided by the issuer (not required), must be given to all customers buying the new issue and upon request to broker-dealers.

What happens if an issue does not provide an Official Statement?

Broker-dealers are no required to provide it to purchaser or other broker-dealers

Negotiated Deals

When a municipality hires a managing underwriter to distribute a new issue of revenue Bonds, negotiating terms and interest cost directly with the municipality

Competitive bidding

Where the municipality requests sealed bids from underwriters or underwriting syndicates

Underwriting Agreement

an agreement among underwriters describing the terms and interest cost of a new bond issue in a negotiated deal.

How are most General Obligation Bonds awarded?

Through COMPETATIVE BIDDING based on the lowest net interest cost

Net Interest Cost (NIC)

The total amount of interest a municipality will pay on a bond issue, subtracting any premium over par received from bond sales

What is the difference between Net Interest Cost and True interest Cost

True interest Cost considers the time value of money; Net Interest cost does not.

Municipal Notes

Short-Term municipal debt instruments used for temporary interim financing

Tax Anticipation Note (TAN)

A note issued to raise money that will be paid off with future tax receipts.

Revenue Anticipation Notes (RAN)

a not issued note raise money that will be paid off with expected future revenues

Tax and Revenue Anticipation Note (TRAN)

A Note combining features of both tax anticipation and revenue anticipation notes

Anticipation Note (BAN)

A note issued to raise money temporarily until long term bonds are sold and their revenues received

Grant Anticipation Notes (GAN)

Notes issued to raise money based on federal grants, often for transit-related purchases like buses and trains, dependent on Congressional appropriation

Construction Loan Notes (CNL)

Notes typically issued by municipalities to fund housing projects.

Demand Notes

Short Term municipal notes callable on demand by the holder

Tax-exempt Commercial Paper

Short-term (max 270 days) paper issued to raise working capital, cover extraordinary expenses, or cover construction, maintenance costs.

(Not used to refund outstanding Bonds)

Build America Bonds (BABs)

Taxable municipal bonds issued for infrastructure projects like schools, hospitals, and roads. Interest payments are full taxable to investors

Can Build America Bonds (BABs) be used to refinance outstanding debt?

No, BABs cannot be used ot refinance existing debt.

How are interest payments on Build Back America (BABs) subsidized?

The Federal Government pays the municipality 35% of the interest paid, or bondholders can take a federal tax credit equal to 35% of the interest.

How do Build America Bonds (BABs) affect the municipal bond market?

The expand the market to pension plans and foreign investors

Municipal Fund Securities

Investment products like Local Government Investment Pools (LGIPs), ABLE Programs, and 529 Plans, sold directly or via advisers

Local Government Investment Pools (LGIPs)

Funds created under state law allowing small government entities to pool assets for better diversification, management , and liquidity;exempt form SEC registration

what is the downside of LGIPs being exempt from SEC registration?

Reduced investor protections compared to registered funds

MSRB Rule G-37

Regulates political contributions made by Municipal Finance Professional (MFPs), dealers, or PACs to officials of issuers

Who is considered an "official of the issuer" Under MSRB Rule G-37

Anyone who was an incumbent, candidate, or successful candidate at the time of the contribution - even if they later lose the election

What is the contribution limit for Municipal Finance Professionals under MSRB Rule G-37?

$250 per election, and then MFP must be eligible to vote in that election

What Happens if a municipal dealer violate MSRB Rule G-37 contribution limits?

The dealer is barred form municipal securities business for two years with the issuer involved.

What is Form G-37and when must it be filed?

A form municipal dealers file Quartey with MSRB disclosing contributions to officials of issuers, political parties, and bond ballot campaigns exceeding permitted limits.

Municipal Variable Rate Scurities

Debt securities with floating or fluctuating interest rates, usually resetting at intervals, with maturities over 10 years

Three types of Municipal Variable Rate Securities

Variable Rate Demand Obligations (VRDO) or Notes "floaters")
Floating Rate Notes (FRNs)
Auction Rate Securities (ARNs)

What is a "put" feature in Municipal Variable Rate Securities?

A feature allowing investors to sell the security back to the issue at face value plus accrued interest
Offered on: VRDOs and FRNs but NOT n ATSs