Presentation Transcript

1. Municipal Bond Types and Characteristics

   By Sean Hutchens and Jun Park
2. Contents Municipal Bonds History of Municipal Bonds Characteristics of Muni Bonds Types of Muni Bonds Bond Rating Muni Bond Tax Issues Tax-free Payback Retirement Current Issuers Muni Bond Markets Volume Insured Bonds in Trouble Summary Question/Answer Game
3. Municipal Bonds In the United States, a municipal bond (or muni) is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds include: Cities Counties School districts Publicly owned airports and seaports Any other governmental entity (or group of governments) below the state level.
4. History of Municipal Bonds Municipal bonds were first issued by New York City in 1812. In 1902, outstanding state and local government debt was $2.1 Billion By 1927, the amount of debt had jumped up to $14.9 Billion Post-depression government spending slowed progression until about 1981 when $361 Billion worth of munis were outstanding, which an increase of six-fold over 1960 which saw $66 Billion By 2007, about $2.3 trillion in municipal bonds were outstanding, sold by more than 60,000 issuers.
5. Characteristics of Muni Bonds Federal tax exempt Pay lower interest compared to corporate Have high degree of safety Give dependable income
6. Types of Muni Bonds G.O Bonds (General Obligation). Long-term borrowing in which the state issues municipal securities and pledges its full faith and credit to their repayment.  ex: school bonds, city hall bonds, library bonds, etc….. Low default rate Backed by the Government Does not generate profit
7. Types of Muni Bonds Cont’d Revenue Bonds Repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds. ex: toll roads, airports, water/sewer, hospitals Higher interest rates than G.O bonds Not as safe as G.O bonds Self-liquidating
8. Bond Rating Bond rating: A grade given to bonds that indicates their credit quality. Private independent rating services such as Standard & Poor's, Moody's and Fitch provide these evaluations of a bond issuer's financial strength. The bond rate for a state is determined by tax rates.
9. Muni Bond Tax issues Municipal bonds are exempt from federal taxes Federal bonds are exempt from state taxes If an investor resides within the same state in which the municipal bonds were issued, the investor is exempt from state taxes as well as Federal taxes Corporate bonds have no tax-free provision
10. Tax-free Oregon investor
11. Muni Rate = Corp Rate x (1 – Tax Bracket)
12. Payback Funding generated through project revenue or taxation A muni generally pays interest semi-annually Interest rate lower than corporate bonds Principal repaid upon retirement of bond Most muni bonds are retired before maturity
13. Retirement Many munis are serial bonds, which means that a certain percentage will be retired each year after issuance so that the municipality can minimize interest rate risk Retired bonds chosen based upon serial number Callable nature makes munis an uncertain investment with respect to payback date
14. Current Issuers Muni Bonds are issued by states, local governments, and associated agencies such as the police department, fire department, health department, etc. Use municipal bond issues to fund capital projects and other operations for which they (municipalities) want to delay payment Due to tax-exempt status, muni bonds allow local governments to issue debt at relatively low borrowing rates
15. Muni Bond Markets Primary market dealings involve a public offering underwritten by investment bankers and can be sold through either competitive bidding (general obligation bonds) or direct negotiations Secondary market dealings are bought and sold on an over-the-counter market consisting of nearly 2,700 securities dealers (banks and brokerage firms) who are registered with the Municipal Securities Rulemaking Board (MSRB)
16. Volume Approximately $2.3 Trillion worth of municipal bonds and about 2 Million separate bonds outstanding Decline in issuance with economic downturn of 2007/2008 Daily trades average about $11 Billion
17. Insured Bonds In Trouble Many AAA-rated munis are backed by monoline insurers, or insurers who specialize in one type of security With the real-estate collapse, monoline insurers lost much of their capital due to investments in Collateralized Debt Obligations (CDOs) Ambac Financial Chart M.B.I.A. Financial Chart
18. Insured Bonds in Trouble Cont’d These losses have bond rating companies such as Moody’s and Standard and Poor’s wondering whether or not monoline insurers have enough assets to back potential defaults Lack of faith in a monoline’s ability to pay can lead to a devaluation in the ratings of all assets insured by said company Were this to happen, all those holding securities insured by that company would realize deflated value in their asset as it increased in riskiness without increased return
19. Summary Municipal bonds (Munis) are issued by state and local governments to fund projects and operations These bonds are relatively secure, and offer tax benefits at both the state and federal level Relatively cheap debt instrument for the issuing municipalities Main types include General Obligation and Revenue Bonds Total Volume (munis outstanding) has been continually growing
20. Question/Answer Any questions before we start the game?
21. Around The World Trivia: Municipal Bond Edition 2 Players at a time are asked a trivia question 5 second time limit First player with correct answer remains, and next player joins for another question Single elimination Last player standing wins Poker suits, best to worst: spades, hearts, diamonds, clubs