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Municipal Bonds

Municipal Bonds. BA 561 – Supply Chain Management April 30, 2012 Chip Ullstad. Overview. What is a municipal bond?. Who sells municipal bonds & why?. Who buys municipal bonds & why?. Bond ratings, risks and regulation. Summary & Questions. What is a municipal bond?.

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Municipal Bonds

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  1. Municipal Bonds BA 561 – Supply Chain Management April 30, 2012 Chip Ullstad

  2. Overview What is a municipal bond? Who sells municipal bonds & why? Who buys municipal bonds & why? Bond ratings, risks and regulation Summary & Questions

  3. What is a municipal bond? Fixed debt instruments Tax secured bonds Revenue secured bonds Terms and volume

  4. Who sells municipal bonds? State and local governments School districts Service districts Public utilities Self-funding infrastructure

  5. Why sell a municipal bond? Fund capital improvements Tax leveraged financing Align revenue and debt streams Stagger principal repayment Short term financing

  6. How are municipal bonds sold? Voter approval Legal opinion Audit report Competitively bid Structure (serial bonds)

  7. What is a serial bond?

  8. Bond funded facilities

  9. Reliance on municipal bonds $3,700 B $361 B $20 B 1945 1980 2010

  10. Who buys municipal bonds? MUNICIPAL BOND INVESTORS, 09/2011

  11. Why buy a municipal bond? Tax exempt earnings lFederal (almost all) lState (depends) lLocal (depends) Advantages vary with AGI

  12. Tax Equivalent Rates (Federal)

  13. States with income tax

  14. Example Frances, AGI = $250,000

  15. Example Charlie, AGI = $20,000

  16. Bond Rating Agencies Bond rating agencies lMoody’s (major) lStandard & Poors (major) lFitch (minor) Ratings protect bond buyers

  17. Bond ratings and risks Bond rating criteria lEconomy lFinancial health lDemographics Regulation

  18. Risk comparison

  19. Summary Muni’s fund capital improvements Two general types of bonds & security Individual & institutional investors Can shelter earned & investment income Like all investments, carry risk

  20. Questions

  21. References Bond rating criteria, http://www.munibondadvisor.com/rating.htm Municipal bond regulation, http://www.sec.gov/info/municipal.shtml Municipal bond debt history, http://www.sec.gov/spotlight/municipalsecurities.shtml Definition of municipal bonds, http://www.investinginbonds.com/learnmore.asp?catid=8&subcatid=53&id=231 Data for municipal bond holder graph, http://2.bp.blogspot.com/-Yo8EgQgF3K4/UCuqUb1NpHI/AAAAAAAABbM/oMiAnED24JE/s400/6a01348793456c970c0163064 Serial bond table (munis vs. corporate, http://www.investinganswers.com/images/definition%20--%20serial%20bond.gif Map, state income tax rates, http://taxfoundation.org/sites/taxfoundation.org/files/docs/income_rates_large.png Municipal bond rating criteria, http://www.munibondadvisor.com/rating.htm

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