Slide 1ContentsSlide 3Slide 4Characteristics of Muni BondsSlide 6Slide 7Slide 8Slide 9Slide 10Slide 11PaybackRetirementCurrent IssuersMuni Bond MarketsVolumeInsured Bonds In TroubleInsured Bonds in Trouble Cont’dSummaryQuestion/AnswerAround The World Trivia: Municipal Bond EditionMUNICIPAL BOND TYPES AND CHARACTERISTICSBy Sean Hutchens and Jun ParkContentsMunicipal BondsHistory of Municipal BondsCharacteristics of Muni BondsTypes of Muni BondsBond RatingMuni Bond Tax IssuesTax-freePaybackRetirementCurrent IssuersMuni Bond MarketsVolumeInsured Bonds in TroubleSummaryQuestion/AnswerGameMunicipal BondsIn 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 CountiesSchool districtsPublicly owned airports and seaports Any other governmental entity (or group of governments) below the state level.History of Municipal BondsMunicipal bonds were first issued by New York City in 1812.In 1902, outstanding state and local government debt was $2.1 BillionBy 1927, the amount of debt had jumped up to $14.9 BillionPost-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 BillionBy 2007, about $2.3 trillion in municipal bonds were outstanding, sold by more than 60,000 issuers.Characteristics of Muni BondsFederal tax exemptPay lower interest compared to corporateHave high degree of safetyGive dependable incomeTypes of Muni BondsG.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 GovernmentDoes not generate profitTypes of Muni Bonds Cont’dRevenue BondsRepayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds.ex: toll roads, airports, water/sewer, hospitalsHigher interest rates than G.O bondsNot as safe as G.O bondsSelf-liquidatingBond RatingBond 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.Muni Bond Tax issuesMunicipal bonds are exempt from federal taxesFederal bonds are exempt from state taxesIf 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 taxesCorporate bonds have no tax-free provisionTax-freeOregon investorCity of CorvallisNike Out-of-State Municipality*Bond Rate*Initial Investment*Annual Income6%$100,000$6,0008%$100,000$80007%$100,000$7,000*Fed Tax 25% $0 $2,000 $0*State Tax 9% $0 $720 $630*Final Income $6,000 $5,280 $6,370Oregon Tax-free Yields and Estimated Taxable Equivalent Yields- 2009 Tax YearFederal Tax Bracket 15% 25% 28% 33% 35%Taxable Income Single Return$8,350 - $33,950$33,951 -$82,250$82,251 -$171,550$171,551 -$372,950 $372,951 +Taxable Income Joint Return$16,700 - $67,900$67,901 - $137,050$137,051 - $208,850 $208,851 - $372,950 $372,951 +Federal and State Combined Tax Bracket 22.65% 31.75% 34.48% 39.03% 40.85%Oregon Tax-free YieldsFor a given Federal Tax Bracket, a Fully Taxable Bond would need to yield this or more to provide the same or greater after-tax income as an Oregon tax-free bond.1.00% 1.29% 1.47% 1.53% 1.64% 1.69%1.50% 1.94% 2.20% 2.29% 2.46% 2.54%2.00% 2.59% 2.93% 3.05% 3.28% 3.38%2.25% 2.91% 3.30% 3.43% 3.69% 3.80%2.50% 3.23% 3.66% 3.82% 4.10% 4.23%2.75% 3.56% 4.03% 4.20% 4.51% 4.65%3.00% 3.88% 4.40% 4.58% 4.92% 5.07%3.25% 4.20% 4.76% 4.96% 5.33% 5.49%3.50% 4.52% 5.13% 5.34% 5.74% 5.92%3.75% 4.85% 5.49% 5.72% 6.15% 6.34%4.00% 5.17% 5.86% 6.11% 6.56% 6.76%4.25% 5.49% 6.23% 6.49% 6.97% 7.19%4.50% 5.82% 6.59% 6.87% 7.38% 7.61%4.75% 6.14% 6.96% 7.25% 7.79% 8.03%5.00% 6.46% 7.33% 7.63% 8.20% 8.45%5.25% 6.79% 7.69% 8.01% 8.61% 8.88%5.50% 7.11% 8.06% 8.39% 9.02% 9.30%5.75% 7.43% 8.42% 8.78% 9.43% 9.72%6.00% 7.76% 8.79% 9.16% 9.84% 10.14%Muni Rate = Corp Rate x (1 – Tax Bracket)PaybackFunding generated through project revenue or taxationA muni generally pays interest semi-annuallyInterest rate lower than corporate bondsPrincipal repaid upon retirement of bondMost muni bonds are retired before maturityRetirementMany 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 riskRetired bonds chosen based upon serial numberCallable nature makes munis an uncertain investment with respect to payback dateCurrent IssuersMuni 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 paymentDue to tax-exempt status, muni bonds allow local governments to issue debt at relatively low borrowing ratesMuni Bond MarketsPrimary market dealings involve a public offering underwritten by investment bankers and can be sold through either competitive bidding (general obligation bonds) or direct negotiationsSecondary 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)VolumeApproximately $2.3 Trillion worth of municipal bonds and about 2 Million separate bonds outstanding Decline in issuance with economic downturn of 2007/2008Daily trades average about $11 BillionInsured Bonds In TroubleMany AAA-rated munis are backed by monoline insurers, or insurers who specialize in one type of securityWith 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 ChartInsured Bonds in Trouble Cont’dThese losses have bond rating companies such as Moody’s and Standard and
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