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By Sean Hutchens and Jun Park.  Municipal Bonds  History of Municipal Bonds  Characteristics of Muni Bonds  Types of Muni Bonds  Bond Rating  Muni.

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Presentation on theme: "By Sean Hutchens and Jun Park.  Municipal Bonds  History of Municipal Bonds  Characteristics of Muni Bonds  Types of Muni Bonds  Bond Rating  Muni."— Presentation transcript:

1 By Sean Hutchens and Jun Park

2  Municipal Bonds  History of Municipal Bonds  Characteristics of Muni Bonds  Types of Muni Bonds  Bond Rating  Muni Bond Tax Issues  Tax-free  Payback  Retirement  Current Issuers  Muni Bond Markets  Volume  Insured Bonds in Trouble  Summary  Question/Answer  Game

3  In 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  Counties  School districts  Publicly owned airports and seaports  Any other governmental entity (or group of governments) below the state level.

4  Municipal bonds were first issued by New York City in  In 1902, outstanding state and local government debt was $2.1 Billion  By 1927, the amount of debt had jumped up to $14.9 Billion  Post-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 Billion  By 2007, about $2.3 trillion in municipal bonds were outstanding, sold by more than 60,000 issuers.

5  Federal tax exempt  Pay lower interest compared to corporate  Have high degree of safety  Give dependable income

6  G.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 Government  Does not generate profit

7  Revenue Bonds  Repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds.  ex: toll roads, airports, water/sewer, hospitals  Higher interest rates than G.O bonds  Not as safe as G.O bonds  Self-liquidating

8  Bond 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.

9  Municipal bonds are exempt from federal taxes  Federal bonds are exempt from state taxes  If 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 taxes  Corporate bonds have no tax-free provision

10 Oregon investor City of Corvallis NikeOut-of-State Municipality *Bond Rate *Initial Investment *Annual Income 6% $100,000 $6,000 8% $100,000 $8000 7% $100,000 $7,000 *Fed Tax 25%$0$2,000$0 *State Tax 9%$0$720$630 *Final Income$6,000$5,280$6,370

11 Oregon Tax-free Yields and Estimated Taxable Equivalent Yields Tax Year Federal Tax Bracket15%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 Bracket22.65%31.75%34.48%39.03%40.85% Oregon Tax-free Yields For 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)

12  Funding generated through project revenue or taxation  A muni generally pays interest semi-annually  Interest rate lower than corporate bonds  Principal repaid upon retirement of bond  Most muni bonds are retired before maturity

13  Many 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 risk  Retired bonds chosen based upon serial number  Callable nature makes munis an uncertain investment with respect to payback date

14  Muni 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 payment  Due to tax-exempt status, muni bonds allow local governments to issue debt at relatively low borrowing rates

15  Primary market dealings involve a public offering underwritten by investment bankers and can be sold through either competitive bidding (general obligation bonds) or direct negotiations  Secondary 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)

16  Approximately $2.3 Trillion worth of municipal bonds and about 2 Million separate bonds outstanding  Decline in issuance with economic downturn of 2007/2008  Daily trades average about $11 Billion

17  Many AAA-rated munis are backed by monoline insurers, or insurers who specialize in one type of security  With the real-estate collapse, monoline insurers lost much of their capital due to investments in Collateralized Debt Obligations (CDOs) Ambac Financial ChartM.B.I.A. Financial Chart

18  These losses have bond rating companies such as Moody’s and Standard and Poor’s wondering whether or not monoline insurers have enough assets to back potential defaults  Lack of faith in a monoline’s ability to pay can lead to a devaluation in the ratings of all assets insured by said company  Were this to happen, all those holding securities insured by that company would realize deflated value in their asset as it increased in riskiness without increased return

19  Municipal bonds (Munis) are issued by state and local governments to fund projects and operations  These bonds are relatively secure, and offer tax benefits at both the state and federal level  Relatively cheap debt instrument for the issuing municipalities  Main types include General Obligation and Revenue Bonds  Total Volume (munis outstanding) has been continually growing

20  Any questions before we start the game?

21  2 Players at a time are asked a trivia question  5 second time limit  First player with correct answer remains, and next player joins for another question  Single elimination  Last player standing wins  Poker suits, best to worst: spades, hearts, diamonds, clubs

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