Municipal Securities

Chapter 8

Municipal Securities

tax-backed debt secured by tax revenue types

general obligation debt unlimited – secured by issuer’s unlimited taxing power limited – statutory limit on tax rates that can service debt

moral obligation bonds – requires legislative approval to appropriate funds (not legally binding obligation of state)

Debt with Public Credit Enhancement legally enforceable obligation often used for debt obligations of a state’s school systems

Municipal Securities

Revenue bonds for project or enterprise financings – bondholders are

pledged revenues generated by project financed revenues put into revenue fund and then disbursed to

following funds: operation and maintenance fund sinking fund debt service reserve fund renewal and replacement fund reserve maintenance fund surplus fund

operations have priority over servicing debt

Hybrid Munis

Insured bonds secured by issuer’s revenue and insurance company can be insured by monoline or multiline insurers

Bank-backed munis letter of credit agreement irrevocable line of credit revolving line of credit

Refunded bonds portfolio of securities guaranteed by US government placed

in trust so that CFs match those of municipality’s obligation Structured/Asset-Backed bonds

Municipal Derivative Securities created by separating interest and principal

pmts into different classes bond classes derive their value from underlying

fixed-rate muni development parallels that in taxable mkt (Ch. 11)

types floaters/inverse floaters strips and partial strips

Floaters/Inverse Floaters

Floaters/Inverse Floaters

sum of rate on floater and inverse floater adds to rate on fixed rate security if mkt rates fall, rates on floater will fall and rates

on inverse floater will increase mkt for inverse floaters not very liquid use of floaters/inverse floaters allows investor

to create synthetic fixed-rate bond with option to separate in future option for investors allows issuer to drop yield

some

Credit Risk

Moody’s and S&P credit concerns because of past defaults and

“innovative” ways to finance issues GO bonds

overall debt structure issuer’s ability to maintain sound budgetary policy specific local taxes and intergovernmental revenues

available to issuer issuer’s overall socioeconomic environment

revenue bonds in general, determination of whether financed project will

generate sufficient cash flows

Yields on Munis

investor in 40% marginal bracket considering muni with yield of 6.5%