Municipal outline

bearer bond

• redeem when it matures 
• redeem when it is called
• holder may have to worry about missed interest payments
• if holders fail to collect principal or fail to see redemption notice they do not lose anything except an interest payment on the bond

registered bonds

• holder can redeem by sending bond certificate to issuer
• issuer sends holder a check for principal + accrued interest
• holder may have to worry about missed interest payments
• if holders fail to collect principal or fail to see redemption notice they do not lose anything except an interest payment on the bond

book entry bonds

• trustees send principal amount and last interest payment to name on books
• book-entry: no worry about missed interest payments

notice of redemption

• issuers must give notice 30 days before they call bonds and publish intent in national financial publication like Wall Street Journal 

how bonds are called

term bonds

• called on a random selection basis

serial bonds

• called in inverse chronological order of maturity
• random basis, if only a portion of a year's issue is called

Bond Buyer

• if a bond called, it will be listed in Bond Buyer
• broker/dealers have obligation to tell clients about call

A municipality has issued a serial bond. The city has just had an influx of money and would like to call the bonds. By what method would the city call the bonds?

• inverse chronological order
• serial bonds-taken oldest first-highest interest rates
• term bonds-random method

Overlapping debt

• general obligation bond-shared debt by two taxing areas, benefits both areas

Net direct debt

• net direct debt=(old debt + newly proposed debt)/(city population)
• net debt=(old debt+overlapping debt+newly proposed debt)/(city population)

coterminus debt service

• when 2 or more municipal areas have same boundaries
• all debt is overlapping

Analyzing revenue bonds 

1. in bond indenture, look at flow of funds-how $ spent, is issuer good for it, revenues pledge-how interest will be paid 
2. covenants-rate, insurance-insurance for project, maintenance
3. feasibility studies, competitive analysis, engineering studies, capital improvements, can issuer raise rates freely without muni or government interference, study- is customer base diversified?, comparison of rates in similar projects locally, tax base and population-growing?,shrinking?

Which of the following is the method of finding the net debt of a municipality?

• (Municipal debt + overlapping debt)/ (city population)
• net debt includes overlapping debt

debt service

• $ of principal and interest/year
• term bond-same until maturity date-same interest cost + principal
• serial bond-principal + interest, can change 
• level debt service-principal + interest, same through life of bond

debt service coverage

• (gross revenues pledge)=(total revenues)/(debt service)
• net revenues pledge=(total revenues-maintenance/debt service)

Municipal bond insurance

• in case muni defaults on interest and principal payments
• MBIA-Municipal Bond Insurance Association
• AMBAC-American Municipal Bond Assurance Corporation
• FGIC-Federal Guarantee Insurance Corporation

A municipality has insurance on its outstanding $40 million general obligation. By purchasing insurance, the issuer: 

• Providing a means to have principal and interest paid in event of default by municipality.