series 7; Ch. 6
Terms
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- Municipal Debt
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* Issued by states & counties & school districts of state
* All with maturities over 1 year must be issued in FULLY REGISTERED form
* Par value for munis = $1000
* Round lot is $100,000 par value - Federal Tax Exemptions
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* Advantage of municipal bonds is that thier interest payments are NOT taxed on federal level
* State & local gov't give tax exempt status to any bond issued within that state
* Automatic Triple Tax Exempt Status: Puerto Rico, US Virgin Islands, Guam, American Somoa - Private Activity Bonds
- * Subject to Alternative Minimum Tax (AMT) -Ensures that wealthy folks pay taxes too.
- Taxable Equivalent Yield
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* Richer an investor is, the more they would benefit from a muni's tax exempt status.
* Due to tax advantages munis have, they are NOT wise investments for tax deferred accounts such as retirement & pension plans. - Formula: Tax Equivalent Yield
- Tax Equivalent Yield = Muni Yield / (100% - Tax Bracket%)
- Net Yield
- If you have a taxable bond, & you want to find what a muni needs to yield to give the same return, find the NET YIELD.
- Formula: Net Yield
- Net Yield = Taxable Yield x (100% - Tax Bracket%)
- Original Issue Discount (OID) Bonds
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* Zero coupon bonds = accredited = tax exempt
*If OID bond is sold proior to maturity ABOVE the accredited amount, it would be taxed as capital GAIN.
* If OID bond is sold BELOW, it would be capital LOSS - Municipal Obligations; 3 basic types of debt
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1) General Obligation Bonds
2) Revenue Bonds
3) Anticipation Notes - General Obligation Bonds
- * States issue GO bonds which are secured by taxing income, sales, gasoline
- Ad Volerem Taxes (Property Taxes)
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* Levied on assessed value of pproperty, NOT market value
* Amount of the tax is expressed in millions - Formula: Tax Paid
- Assessed Value x Million Rate
- Voter Referendum
- * Approval is required for GO bond, because it's the public's tax dollars that would be used to repay the debt.
- Debt Statement
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1) Direct Debt = All the debt issued by the issuer
2) Net Direct Debt = All the direct debt minus any "self-supporting" debt such as revenue bonds & anticipation notes.
3) Overlapping debt = debt of school districts which overlaps the tax base of another - Formula: Net Overall Debt
- Net Overall Debt = the Net Direct debt + Overlaping debt
- Debt Per Capita
- A municipalities Net Overall Debt divided by its total population
- Revenue Bonds
- Used to build facilities that charges somefees, i.e. tolls, airports, bridges hospitals, turnpikes, water systems
- Housing Revenue Bonds
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* Used to help low to moderate income families buy homes
* Proceeds to real estate developers or bolster mortgage market - Health Care Revenue Bonds
- * Build Hospitals
- Utility revenue bonds
- * Build gov't owned electric, gas water & sewer systems
- Special Assessment bonds
- * Sidewalks, street lights
- Transportation BOnds
- * Turnpikes, bridges, airports, public transit systems.
- Industrial Development Revenue & Pollution Control Revenue Bonds
- * Lease agreement w/a corp
- Special Tax Bonds
- *Debt service is paid through proceeds froma specific tax, i.e. roads build with gasoline tax
- Double Barrelled bonds
- * Backed by 2 sources of revenue, usually tax dollars & project's revenue
- Moral Obligation Bonds
- * Bonds are secured by the revenues of a project
- Public Housing & New Housing Authority BOnd
- * Build low income housing, section 8 housing, NO longer issued
- Analyzing Revenue Bonds
- * Self supporting, economically viable
- Debt Service Coverage Ratio
- * Higher the ratio, the more secure the coverage
- Flow of Funds
- * Tells invostors in what order the revenues are to be spent.
- Net Revenue Pledge
- * Operating & maintenance costs are paid prior to debt service
- Gross Revenue Pledge
- * Debt service is paid first, less common, used most often w/health care revenue bonds.
- Revenue Fund
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* Operation & Maintenance Fund
* Debt Service Fund
* Debt Service Reserve Fund
* Replacement & Renewal Fund
* Sinking Fund
* Surplus Fund - Anticipation Notes
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* Short term interest bearing securities
* Pay interest upon maturity
* Used in Bridge Financiing - Tax Anticipation Notes
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* Usually GO Securities
* Used to finance current municipal operations
* Paid w/future taxes - Bond Anticipation Notes
- * Used to financeprojects which will be paid for w/a future bond issue
- Grant Anticipation Notes
- * Issued w/expectations of receiving federal grant
- Revenue Anticipation NOtes
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* Usually GO securities
* Will be paid w/future revenues of a project - Construction loan Notes
- * Used to start construction projects which will eventually be funded through a bond issue
- Insuring municipal Bonds
- When a bond is insured, it receives the highest credit rating from Moody's and S&P
- Optional Redemption
- * Issuer can call the bonds AFTER a certain date, but they have no obligation to do so.
- Mandatory Redemption
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* Indenture requires the issuer to call bonds on a set schedule
* Bonds are drawn randomly
* When part of the issue is called, the credit rating of the remaining issue will increase as the issuer demonstrates their ability to pay. - Extraordinary Optional Redemption
- * If an unusual event specified in the indenture occurs, the issuer has the option to call the bonds, i.e. mortgages are prepaid
- Extraordinary Mandatory Redemption
- If an event in the indenture occurs, the issuer must call the bonds, i.e. earthquake, hurricane; Catastrophe Call Covenant
- Refunding
- *New bons are issued to retrie old bonds
- Tender Option
- Allows the bond holder to "put" the bonds back to the issuer
- Tender Offer
- Allows the issuer to retire old debt prior to maturity. It is done w/non-callable bonds.