municipal bonds

(noun)

A municipal bond is a bond issued by an American city or other local government, or their agencies.

Related Terms

Examples of municipal bonds in the following topics:

  • Taxes and Bond Prices

    • For example, the U.S. government bonds have a lower risk of default and higher liquidity than municipal bonds, whereas municipal bonds are the state and local government bonds.
    • However, the interest rates of municipal bonds are consistently lower than U.S. government bonds for the last 50 years because investors do not pay U.S. taxes on the interest they earn on municipal bonds while they pay U.S. government taxes on U.S. government securities.
    • Government taxes both the municipal and non-municipal bonds while the default risk, liquidity, and information costs are equivalent for both markets.
    • Government has exempted municipal bonds from federal taxes.
    • Therefore, municipal bonds have a lower interest rate than U.S. government bonds.

  • The Nature of Bonds

    • A bond is an instrument of indebtedness of the bond issuer to the holders.
    • The main categories of bonds are corporate bonds, municipal bonds, and U.S.
    • Bond maturities range from a 90-day Treasury bill to a 30-year government bond.
    • Corporate and municipal bonds are typically in the three to 10-year range.
    • A bond is a form of loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.

  • Types of Bonds

    • This bears the owner's name on the bond certificate and in the register of bond owners kept by the bond issuer or its agent, the registrar.
    • A term bond matures on the same date as all other bonds in a given bond issue.
    • Serial bonds in a given bond issue have maturities spread over several dates.
    • Interest income received by holders of municipal bonds is often exempt from the federal tax and the issuing state's income tax.
    • Some municipal bonds issued for certain purposes may not be tax exempt.

  • Floating-Rate Bonds

    • Floating rate bonds are bonds that have a variable coupon equal to a money market reference rate (e.g., LIBOR), plus a quoted spread.
    • Floating rate bonds (FRBs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a quoted spread (i.e., quoted margin).
    • There are many variations of floating-rate bonds.
    • FRBs can also be obtained synthetically by the combination of a fixed rate bond and an interest rate swap.
    • Thus, FRBs differ from fixed rate bonds, whose prices decline when market rates rise.

  • Par Value at Maturity

    • A bond selling at par has a coupon rate such that the bond is worth an amount equivalent to its original issue value or its value upon redemption at maturity.
    • Corporate bonds usually have par values of $1,000 while municipal bonds generally have face values of $500.
    • Federal government bonds tend to have much higher face values at $10,000.
    • Par value of a bond usually does not change, except for inflation-linked bonds whose par value is adjusted by inflation rates every predetermined period of time.
    • Bond price is the present value of coupon payments and the par value at maturity.

  • The Valuation of Bonds

    • This coupon bond is a U.S.
    • We calculate the bond market price in Equation 4, and the bond's market price, PV0, equals $930.70.Consequently, investors would earn a 12% return on their 8% interest bonds.
    • Bearer Bonds: Who possesses these bonds receive the interest payment.Coupon bonds are usually bearer bonds.
    • Debenture Bonds are unsecured bonds.Thus, the corporation does not pledge assets for the bond issues.A corporation must be financially strong to issue these bonds because these bonds rely on the corporation's credit standing.
    • Municipal Bonds: City and county governments issue municipal bonds to finance local projects.These bonds are popular with investors because the U.S. government does not tax their interest earnings.Consequently, municipal bonds usually pay lower interest rates than other bonds.

  • Financial Instruments

    • Treasury Notes or T-notes from one to 10 years, while Treasury Bonds or T-bonds have maturities greater than 10 years.These Treasury securities have a stated interest rate, and government usually pays interest every six months.
    • State and local governments can issue bonds, called municipal bonds.The U.S. federal government encourages investors to buy these bonds by exempting investors from U.S.income taxes.Furthermore, municipal bonds fall under two categories: General-obligation bonds and revenue bonds.For general-obligation bonds, a state or local government guarantees the bonds payment with its taxing power.For instance, a city government buildsa new firehouse.Then the city government guarantees payment of the bonds with its power to tax.For revenue bonds, local or state government secures the bonds' payment by the revenues that the project generates.For example, a college builds a new dormitory, using revenue bonds.When the students pay to live there, the university pays the bondholders some of the revenue.
    • We include stocks and bonds that we had defined earlier in this chapter.
    • Government agencies can issue securities.For example, Sallie Mae is a quasi-government agency and lends to college students.Then Sallie Mae pools the student loans into a fund and issues bonds, allowing investors to buy into the fund.Subsequently, the investors indirectly earn the interest from the students' monthly payments.Thus, Sallie Mae increases the liquidity of student loans.

  • Capital Market

    • In primary markets, new stock or bond issues are sold to investors.
    • The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies).
    • Governments tend to issue only bonds, whereas companies often issue either equity or bonds.
    • The main entities purchasing the bonds or stocks include pension funds, hedge funds, sovereign wealth funds, and, less commonly, individuals and investment banks trading on their own behalf.
    • A key difference is that with a regular bank loan, the lending doesn't take the form of resalable security like a share or bond that can be traded on the markets.

  • Bond Rating System

    • The credit rating is a financial indicator assigned by credit rating agencies; bond ratings below BBB-/Baa are considered junk bonds.
    • Bond ratings below BBB-/Baa are considered to be not investment grade and are colloquially called "junk bonds. "
    • Under the Credit Rating Agency Reform Act, an NRSRO may be registered with respect to up to five classes of credit ratings: (1) financial institutions, brokers, or dealers; (2) insurance companies; (3) corporate issuers; (4) issuers of asset-backed securities; and (5) issuers of government securities, municipal securities, or securities issued by a foreign government.
    • Bonds that are not rated as investment-grade bonds are known as high-yield bonds or more derisively as junk bonds.
    • Bond ratings below BBB-/Baa are considered to be not investment grade and are colloquially called "junk bonds

  • The Public Debt

    • In the U.S. and other federal states, "government debt" may also refer to the debt of a state or provincial government, municipal or local government.
    • A government bond is a bond issued by a national government.
    • Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
    • Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds.
    • An advantage of issuing bonds in a currency such as the US dollar, the pound sterling, or the euro is that many investors wish to invest in such bonds.