Presentation on theme: "ORANGE COUNTY BANKRUPTCY HISTORY OF MUNICIPAL BOND DEFAULTS PRESENTED BY: WENQIAN CHEN (FRANCES) APRIL 30 TH, 2013."— Presentation transcript:
ORANGE COUNTY BANKRUPTCY HISTORY OF MUNICIPAL BOND DEFAULTS PRESENTED BY: WENQIAN CHEN (FRANCES) APRIL 30 TH, 2013
AGENDA What is Municipal bond? What is default? Default risks? What happened to Orange county in 1994? Why?? How??? Summary
MUNICIPAL BOND Brief Introduction A Municipal bond is issued by a local government or agencies. Municipal bonds may be general obligations of the issuer or secured by specified revenues. interest income received by holders of municipal bonds is often exempt from federal and state income tax. municipal bonds are free to trade at any time once they are purchased by the investor. Rm=Rc (1-t)
TYPES AND RISKS Written Financial Plan
DEFAULTS A default is a situation when a debt obligation is not met, that is, the principal or interest payments are not paid when they are due. In the event of a default, bondholders seldom lose all of their principal value of the bond. Often, a default could result in the suspension of the coupon payment.
DEFAULT RISK (CREDIT RISK) Municipal defaults usually follow downswings in business cycles and more likely to occur in high growth areas that borrow heavily. Credit Risk Ratings: scale is AAA, AA, A, BBB, BB, B, CCC, CC, C, and rating D for bonds in arrears Five major bond rating agencies are Standard and Poor's, Moody's, Fitch Ratings, Dominion Bond Rating Service and A.M. Best.Standard and Poor's Moody'sFitch RatingsDominion Bond Rating Service A.M. Best
ORANGE COUNTY BANKRUPTCY Robert Lafee Citron: Democratic politician party who was the longtime Treasurer-Tax Collector of Orange County, California, when it declared bankruptcy on December 6, 1985: Earned $172 million for the county 1992: European currency market crisis forced him to sell $400 million in complicated securities. 1994: Lost $1.6 M, defaulted $1 M in 1995 Rising interest rates: wrong answer from Robert.
ORANGE COUNTY BANKRUPTCY
INVEST IN SECURITIES YIELDS INVERSELY RELATED TO INTEREST RATES
HOW THE INVESTMENT POOL WORKED Investment Pool
HOW DID IT HAPPEN Bankruptcy
SUMMARY Introduction of municipal bonds Types of municipal bonds Default risks Orange county bankruptcy