CH.5 [municipal debt]

Municipality

State, city, or local government

corporate bond interest

Subject to federal, state, and local taxes

municipal bond interest

• Exempt from federal taxes

• Subject to state and local taxes

US territory bond interest

Tax-free regardless of residence

US government bond interest

• Subject to federal taxes

• Exempt from state and local taxes

non-self-supporting projects

Do not make revenue

general obligation bonds

• Fund non-self-supporting projects

• Paid off with property (ad valorem) taxes

Used to analyze G.O. bonds

• Economic diversity

• Population trends

• Municipal obligations

• Tax collection figures

Municipal bond registration status

Exempt from SEC registration

municipal advisers

• Help structure bond issues

• Cannot act as the underwriter

bond counsel

• Group of specialized lawyers

• Provides legal opinion on a bond’s:

  • Validity

  • Legality

  • Tax-status

• Unqualified opinions are optimal

• Qualified opinions make bonds less marketable

G.O. bond requirements

• Subject to voter approval

• Subject to debt limits

• Sold on a firm commitment basis

Official notice of sale

• Notifies underwriters of a municipal bond sale

• Found in the Bond Buyer

competitive bids

• How G.O. bonds are sold

• Awards bond to cheapest underwriter

official statements

• Disclosure document for municipal securities

• Issuers are not required to create them

• Underwriters must deliver them by settlement (if created)

• Information disclosed includes:

  • The bond’s interest rate

  • Timing of interest payments

  • Length of the bond (maturity)

  • Specific features of the bond (e.g., call features)

  • Source of repayment funds (e.g., property taxes)

  • The municipality’s finances

  • Legal matters, including the legal opinion

Limited Tax Funds

• considered a type of G.O. bond

• Only have access to predetermined tax allotments

• Riskier than typical G.O. bonds

self-supporting ventures

Make revenue to pay off borrowed funds

revenue bonds

• Paid off with revenues from municipal ventures

• Finance self-supporting municipal ventures

• No voter approval is required

• Not subject to debt limits

feasibility studies

• Forecast profitability of a municipal venture

• Created by independent consultants

municipal bond markets

• Higher levels of liquidity risk

• No short sales

yield (basis) quotes

• Typical for municipal bonds

• Provide yield, not price

municipal bond sustainability

• Best for wealthy investors at high tax brackets

• Not suitable for retirement plans