Slide 1The Muni Market at a GlanceWhy People Buy Bonds?Types of Municipal BondsTaxabilityBond YieldsComparing YieldsWhen Does it Make Sense to Buy Municipal Bonds?Corporate-Municipal SpreadsConsider This…Tax Equivalent YieldYield CurvesMunicipal Bonds vs. Corporate BondsOther FeaturesFuture OutlookQuestions?SourcesMunicipal Bond Types & CharacteristicsYinyin CaoThe Muni Market at a Glance0More than 50,000 state and local issuers0Outstanding municipal bonds: 2.9 trillion0Almost 500 billion new bonds issued each year0American households are the single largest holdersWhy People Buy Bonds?0Predictable, tax-free income stream0High degree of safety0Low default rates0Bond insurance0Low volatility0DiversificationTypes of Municipal BondsRevenue Bonds Tax-Backed DebtGeneral Obligation DebtAppropriation-Backed ObligationsPublic Credit Enhancement ProgramsHybrid/Special BondsInsured BondsPrerefunded BondsAsset-Backed BondsZero Coupon BondsTaxable Municipal BondsTaxability0Generally tax-exempt0Taxation on acquisition, ownership, and disposition0Private Activity Bonds0Alternative Minimum Tax (AMT)0Taxable Municipal Bonds0e.g. Build America Bonds (BABs)Bond YieldsComparing YieldsWhen Does it Make Sense to Buy Municipal Bonds?0Available Investment: $10,0000Potential Alternatives:010 yr, AAA-rated municipal bond yielding 4.5%, and 0Similarly rated corporate bond yielding 5.5%Tax RateMunicipal BondsCorporate BondsSpread10% $450 $495 $-4515% $450 $467.5 $-17.525% $450 $412.5 $37.528% $450 $396 $5433% $450 $368.5 $81.535% $450 $357.5 $92.5Corporate-Municipal SpreadsConsider This…0At what marginal tax rate would an investor be indifferent between buying municipal or taxable bonds?0What interest rate on a corporate bond would you require in order to earn a better return than 4.5% on municipal bonds?0Tax Equivalent Yield (TEY)Tax Equivalent Yield0Higher tax brackets derive more benefit from munis0Changing tax rates will affect the corporate-municipal yield spread0Higher tax brackets derive more benefit from munis.0Changing tax rates will affect the corporate-municipal yield spread.0Competition with other markets increases when the economy is strong.Yield Curves0Word to the wise-Never ignore an inverted yield curve.Municipal Bonds vs. Corporate Bonds MunisCorporate Bonds0Serial maturity structure0Do not require registration0OTC, lower trading levels0Term maturity structure0More disclosure/ transparency0More market liquidityOther Features0Variable interest rates0Calculated periodically based upon a percentage of other interest rates0Call provisions0Permits issuer to replace debt with lower costs0Call price set at a premium0Put features0Yields are often lower0Sinking fund provisions0Reduces risk of default0Price may be lower than market priceFuture Outlook0Continued budget stress for some municipalities0Defaults are extremely rare0States and many municipalities are not legally allowed to file for bankruptcy0Important to understand the ample protection of municipal bonds0Supply/demand imbalances0Effect of negative headlines on retail investors 0Expiration of BABs0Attractive tax equivalent incomeQuestions?Thank You…Sources0InvestinginBonds.com http://www.investinginbonds.com/learnmore.asp?catid=80Investopedia http://www.investopedia.com/university/advancedbond/advancedbond4.asp0MSRB http://www.msrb.org0MunicipalBondsToday.com http://www.municipalbondstoday.com/25/municipal-bond-basics/ 0Wikipedia
View Full Document
![High Yield Bonds [ Junk Bonds ] and Their History](https://media.gradebuddy.com/documents/1727179/2546efe0-ea63-48af-99b9-6a7c5560bba2.png)
Unlocking...