municipal securities outline

Industrial development bonds

• municipalities issue IDB'S
• To finance construction of a)pollution control facilities, b)industrial parks, c)sports stadiums.
• • D) airports, e) educational facilities
  • Municipal bond, tax-exempt
  • Sell proceeds to corporation-pays interest and principal
  • Mainly for stadiums, convention centers, etc.
  • Take on bond rating of corporation not bond rating of municipality
  Public Housing Authority Bonds (PHA)
  ·       U.S. government issues bonds
  ·       To finance state and local low-income housing
  ·       Proceeds pay off project notes/construction loan notes issued to construct and renovate low-income housing projects
  ·       Proceeds pay off loans made directly to developers of low-income housing
  ·       Proceeds lend $ to institutions for loans to homebuyers
  ·       PHA bonds-paid by rent and mortgage payments made by residents
  ·       Projects, paid for by bond proceeds
  ·       If residents rent payments don’t pay back principal and interest, federal government will pay back principal and interest
  ·       PHA, issued by state and local housing agencies
  ·       PHA, backed by federal government
  ·       PHA bonds encourage building low income homes
  Double barreled bonds
  ·       Generate funds to pay for a specific facility
  ·       Revenue bond & general obligation bond
  ·       Interest and principal-paid by users of facility
  ·       If users can’t pay interest and principal-property taxes pay back interest and principal, taxing power of municipality
  ·       Football and baseball stadiums in large cities
  Mortgage obligation bonds
  ·       Facility revenues pay interest and principal payments
  ·       If facility revenues can’t pay back interest and principal, state legislature/local council can make a yearly appropriation to have debt service covered
  Which of the following bonds is issued by a municipality but will have interest and principal payments paid by the revenues from a corporation?
  ·       Industrial development bond.
  ·       Issued by municipality to benefit muni
  ·       Corporation income makes income and principal payments
  ·       Assumes corporation’s credit rating
  Build America Bonds BABs
  ·       Municipalities issue
  ·       U.S. government subsidizes interest
  ·       Available on secondary market
  ·       Original/first version, U.S. government subsidizes 35% of interest of bond issue
  ·       Municipality-costs decrease, increase interest rates for investor
  ·       Beneficial for buyers who don’t pay income tax or pay a small amount of income tax
  ·       For older people-income
  ·       Institutional investors-not looking for tax free income-achieve high yield and long time to maturity
  ·       Second version: buyers get tax credit=35% of interest on bond yearly
  ·       If buyer doesn’t pay enough taxes for tax credit to be useful, tax credit can be carried over indefinitely without a time limit
  ·       Risks: changing interest rates
  ·       Risks: can government afford to fund issues?
  ·       Risks: will the municipality go bankrupt?
  ·       Risk: liquidity (greatest)
  ·       Risk: small secondary market
  ·       Risk: long period to maturity-30 years
  ·       Interest, pay federal income tax
  ·       Use: highways, upgrade buildings, highways
  ·       Not allowed: use $ for wages, ongoing expenses
  Series Bonds
  ·       Issued at different times/dates within 1 year or different dates over a period of years
  ·       One maturity OR
  ·       Each series bond can have its own serial maturity period
  ·       Can be issued as serial or term bonds
  Serial bonds
  ·       Mature over a # of years
  ·       Parts of bonds mature in different years
  ·       Can be a series bond or only bond
  ·       Price in basis
  ·       Basis book/software program-convert yield to $ or $ to yield
  ·       Some principal matures each year, interest cost decreases each year
  ·       From taxes or revenues from a facility
  Term bond
  ·       Corporations issue, municipalities issue
  ·       Mature at one time
  ·       Can refund/refinance or make sure enough money is available ahead of time to pay it off
  ·       Municipalities issue term bonds when they think they will have too few funds in early years but think they will have the funds by maturity
  ·       If muni has enough funds in early years, advantage-serial bond would decrease interest cost
  ·       Refund debt aka fund debt again
  ·       Refund debt, when: interest cost can decrease
  Which of the following has decreasing interest costs each year?
  ·       Serial bonds
  ·       Part of issue matures each year
  ·       Interest costs decreases to issuer each year
  Series bond
  ·       Different issuing dates
  Term bonds
  ·       Mature at one time
  ·       Interest cost-same each year
  Zero-coupon bond
  ·       Pay no interest
  ·       Mature at face value
  Put bonds
  ·       Investors can redeem before maturity if interest rates rise
  ·       Investors reinvest $ in higher interest bonds
  ·       Issuers add put feature-advantage: give lower interest rates
  ·       During put period, the market price is never <put price. Yield never>coupon
  A municipality has issued a 6% 20 year term bond that has a put feature. Which of the following is true of the put bond during the put period?
  ·       The yield will never be higher than 6%
  ·       Holder can redeem issue without issuer calling
  ·       Bond never sells for less than par
  ·       If bond sold at discount during put period, holder can put bond back to issuer, force issuer to buy bond back at par
  ·       Bond won’t sell less than par, yield never>than coupon