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Municipal Securities


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									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
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%

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