Municipal Bonds BA 561 – Supply Chain Management April 30, 2012 Chip Ullstad
Overview What is a municipal bond? Who sells municipal bonds & why? Who buys municipal bonds & why? Bond ratings, risks and regulation Summary & Questions
What is a municipal bond? Fixed debt instruments Tax secured bonds Revenue secured bonds Terms and volume
Who sells municipal bonds? State and local governments School districts Service districts Public utilities Self-funding infrastructure
Why sell a municipal bond? Fund capital improvements Tax leveraged financing Align revenue and debt streams Stagger principal repayment Short term financing
How are municipal bonds sold? Voter approval Legal opinion Audit report Competitively bid Structure (serial bonds)
What is a serial bond?
Bond funded facilities
Reliance on municipal bonds $3, 700 B $20 B 1945 $361 B 1980 2010
Who buys municipal bonds? MUNICIPAL BOND INVESTORS, 09/2011
Why buy a municipal bond? Tax exempt earnings l Federal (almost all) l State (depends) l Local (depends) Advantages vary with AGI
Tax Equivalent Rates (Federal)
States with income tax
Example Frances, AGI = $250, 000
Example Charlie, AGI = $20, 000
Bond Rating Agencies Bond rating agencies l Moody’s (major) l Standard & Poors (major) l Fitch (minor) Ratings protect bond buyers
Bond ratings and risks Bond rating criteria l Economy l Financial health l Demographics Regulation
Risk comparison
Summary Muni’s fund capital improvements Two general types of bonds & security Individual & institutional investors Can shelter earned & investment income Like all investments, carry risk
Questions
References 1. Bond rating criteria, http: //www. munibondadvisor. com/rating. htm 2. Municipal bond regulation, http: //www. sec. gov/info/municipal. shtml 3. Municipal bond debt history, http: //www. sec. gov/spotlight/municipalsecurities. shtml 4. Definition of municipal bonds, http: //www. investinginbonds. com/learnmore. asp? catid=8&subcatid=53&id=231 5. Data for municipal bond holder graph, http: //2. bp. blogspot. com/Yo 8 Eg. Qg. F 3 K 4/UCuq. Ub 1 Np. HI/AAAABb. M/o. Mi. An. ED 24 JE/s 400/6 a 0134879 3456 c 970 c 0163064 6. Serial bond table (munis vs. corporate, http: //www. investinganswers. com/images/definition%20 --%20 serial%20 bond. gif 7. Map, state income tax rates, http: //taxfoundation. org/sites/taxfoundation. org/files/docs/income_rates_large. png 8. Municipal bond rating criteria, http: //www. munibondadvisor. com/rating. htm
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