- What are Municipal Bonds?
- Who owns Municipal Bonds?
- What are Revenue Bonds?
- What are General Obligation Bonds?
- Who participates in a Bond Transaction?
- What is the role of credit rating agencies related to Municipal Bonds?
- How does the City handle cash?
- How does the City assure preservation of Capital?
- What is liquidity?
- What is yield?
- How can I stay informed about my bonds?
What are municipal bonds?
Municipal bonds (“muni bonds”) are debt securities issued by state and local governments, or their authorized agencies, to borrow or raise money for public purposes such as building schools, highways, or hospitals. When you purchase a municipal bond, you lend money to the "issuer" (i.e., the government entity that issued the bond), which, in turn, pays a set amount of interest while you hold the bond and returns your principal investment on a specified maturity date.
A primary feature of many municipal bonds is that the interest income an investor receives is generally exempt from federal income tax. The interest may also be exempt from state and local taxes if the investor lives in the state where the bond is issued. Municipal bonds, therefore, also are known as tax-exempt bonds.
Because they offer tax-free income, municipal bonds generally have annual yields below those of corporate bonds or U.S. Treasury bonds. These low yields allow state and local governments to borrow money for public projects at below market rates.
Who owns municipal bonds?
Individual, or “retail,” investors are the largest holders of municipal securities.
What are revenue bonds?
Authorities and agencies, created by state governments to perform specific functions, issue bonds for specific needs, such as the construction of a building, that generally have the power to levy fees for their services, such as the operation of water and sewers, or they have contractual arrangements with a government entity that provides payments for services. Revenue bonds, which are the most common type of municipal bonds, are not backed by the taxing power of the government entity.
Most revenue bonds are callable, and can have term, serial, or balloon maturities.
Before most revenue bonds are issued, an independent agency does a feasibility study of the project, with projections of required expenses and revenues. After the project is operating, revenues generated are first used to pay operating and maintenance expenses. Anything left over is considered net revenue, and is allocated:
1. To pay current interest and principal of the issued bonds
2. To fund a reserve to provide for up to 2 years of payments of interest and principal
3. To fund a reserve for the maintenance of the project
4. To expand the project or retire bonds
What are General Obligation Bonds?
General obligation bonds are obligations of a government or its agency, and backing for the bond issues from the issuer's unlimited taxing power. State bonds are generally based upon income, sales, or excise taxes, and city, county, and school district bonds are based upon ad valorem real estate taxes. GO bonds can also be classified according to the taxing power of the issuer.
Who participates in a bond transaction?
1. Financial Advisors
2. Bond Counsel
3. Disclosure Counsel
6. Paying Agents
What is the role of credit rating agencies related to municipal bonds?
One way to evaluate a municipal securities issuer is to examine its credit rating. Credit rating agencies assign credit ratings based on their analysis of an issuer’s ability to make interest payments and repay principal in a timely manner. (Credit rating agencies also grade corporate bonds, but their analysis of corporate bonds differs from their analysis of municipal bonds.)
Bonds rated BBB or Baa, or better, are characterized as “investment grade,” meaning that they have a high probability of being repaid and have few speculative features. Municipal bonds with lower or no ratings carry higher risks, but may also pay the investor higher interest rates to compensate for that risk.
In addition to the ratings provided by credit rating agencies, most institutional investors, including investment companies, conduct their own credit analysis.
How does the City handle cash?
Cash Management is the effective management of the City’s cash collections, disbursements, and information. The City uses an array of cash management services such as cash concentration accounts, zero balance accounts, and automated clearing house facilities, to effectively manage cash collections and disbursements.
It is the policy of the City of Atlanta to invest public funds in a manner that will provide maximum security and optimal yield while meeting the daily cash flow demands of the City. The investment of City funds are structured to assure preservation of capital, liquidity needs, and yield optimization.
How does the City assure preservation of Capital?
Preservation of capital is the primary objective for City of Atlanta. To attain this objective, the City invests in only high quality securities that are categorized as “investment grade” by the rating agencies. The City also implements a diversification strategy aimed to protect potential losses from individual securities.
What is liquidity?
Liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash, is the most liquid asset, and can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs
The City’s investment portfolio is designed remain sufficiently liquid to enable the City to meet all operating requirements that might be reasonably anticipated.
What is yield?
In general, yield is a term that defines a return on a capital investment of various forms. Typically, yield is expressed as a percentage and is used as an annual figure. Yield is also a function of the bond market. One of its applications is current yield, which is a coupon rate of interest divided by the bond's purchase price. Additionally, yield is a rate of return on a bond that takes into account the sum annual interest payment, the purchase price, the redemption value, as well as the time period remaining until maturity. This is also referred to as maturity yield or yield to maturity.
How can I stay informed about my bonds?
Contact your financial professional or visit the Electronic Municipal Market Access (EMMA) http://emma.msrb.org/
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