Municipal bonds

Wall Street Journal  May 22  Comment 
Large U.S. banks will be able use some municipal bonds to meet new postcrisis rules aimed at ensuring they have enough cash during a financial-market meltdown under relaxed rules proposed by the Fed.
Reuters  May 13  Comment 
China is set to let banks and local governments use municipal bonds as collateral for borrowing, according to sources and an official document seen by Reuters, which could pump prime a fledgling market Beijing hopes will help local authorities...  May 4  Comment 
NEW YORK (TheStreet) - Issuance of municipal bonds have steadily increased in 2015 and are up about 60% compared to 2014's pace, according to Jim Grabovac, portfolio manager for the McDonell Intermediate Municipal Bond Fund (MIMAX). The current...
The Times of India  Apr 30  Comment 
The municipal bond market in India has the potential to reach a size of Rs 45,000 crore in the near future, according to India Ratings and Research.
SeekingAlpha  Apr 9  Comment 
The Hindu Business Line  Mar 30  Comment 
SEBI has come up with new norms on municipal bonds in India. The new rules would help local bodies raise money from the public for infra development.What is it?Say your city corporati...
The Economic Times  Mar 29  Comment 
The new norms are expected to give a major boost to the government's initiative of setting up 100 smart cities in the country.


This is a bond issued by a state, city, or local government. Municipalities issue bonds to raise capital for their day-to-day activities and for specific projects that they might be undertaking (such as developing local infrastructure like roads, sewers, parks, hospitals, etc). Interest on municipal bonds is generally exempt from federal taxes, and bonds bought by a resident of the state or other localities are typically exempt from taxes on the interest by the issuing body. Yields on municipal bonds are often lower than corporate or Treasury bonds with comparable maturities, because they have important tax-free advantages. Municipal bonds are considered safer, low-risk investments than corporate bonds, since a municipal government is much less likely to go bankrupt than a corporation. Some municipal bonds are insured by outside agencies, usually a monoline insurer, which promises to pay the interest and principal if the bond's issuer defaults.

Investing in Muni Bonds

Municipal bonds—often referred to as "munis"—are bonds that are issued by municipalities to raise money for projects ranging from road construction projects and new power plants to building parks and zoos.

Munis work no differently than any other bond. Munis have a face value, a coupon rate and a maturity date. However, munis do have one distinct advantage over other bonds—they provide tax-free earnings.

The Federal Government does not count earnings from munis as part of taxable income. This tax treatment helps incentivize individuals to invest in municipal bonds.

Types of Municipal Bonds

There are two primary types of municipal bonds which are referred to as general obligation and revenue bonds. With general obligation bonds, the government entity that issues the bonds puts their "full faith and credit" behind the bonds. Revenue bonds are backed not by the pledge of the government entity but by the revenues of the project for which they were issued to fund. Examples of the types of projects funded with revenue bonds are water and sewage plants, toll roads, and hospitals. If the revenue from the specific project is not sufficient to cover the payments owed to bondholders, then the government entity that issued the bonds is not required to step in and make payments. For this reason revenue bonds are generally considered safer than revenue bonds.

Taxable equivalent yield

Most municipal bonds are free from federal taxes, and if the issuer of the bond is located in the same state where you reside, they can be free of state and local taxes as well. This means that the attractiveness of a municipal bond vs. a corporate or treasury bond is going to vary based on the rate of tax that you pay.

For example, lets say that a tax free municipal bond yields 5% and my federal and state tax rates are 25% and 7% respectively. In this instance I would need a 7.17% on a taxable bond in order to get 5% after taxes. As you can see from this example, the higher that rate of tax you pay, the more attractive municipal bonds are going to be.

Municipal Bond Safety

The default rate for municipal bonds is much much lower than it is for corporate bonds. A report by Moody's[1] which covers municipal bond default rates from 1970 to 2011 shows that the average municipal bond default rate was .13% during that time. This compares to an average default rate for corporate bonds of 11.17% over that same time period.

This shows up in the average credit ratings for municipal bonds compared to corporate bonds as well. The average credit rating for all rated municipal bonds is A. That compares to an average credit rating of B for corporate bonds.

Muni Bond Funds

In a municipal bond fund like the Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX), providing exposure to not one but hundreds of municipal bonds. This gives diversification at a relatively low cost.


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