Municipal BondsBA 561 – Supply Chain ManagementApril 30, 2012Chip 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?

Fixed debt instruments

Tax secured bonds

Revenue secured bonds

Terms and volume

Who sells municipal bonds?

State and local governments

School districts

Service districts

Public utilities

Self-funding infrastructure

Why sell a municipal bond?

Fund capital improvements

Tax leveraged financing

Align revenue and debt streams

Short term financing

Stagger principal repayment

How are municipal bonds sold?

Structure (serial bonds)

Competitively bid

Audit report

Legal opinion

Voter approval

What is a serial bond?

Bond funded facilities

$3,700 B$361 B$20 B

1945 1980 2010

Reliance on municipal bonds

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

Why buy a municipal bond?

Tax exempt earnings

Federal (almost all)

State (depends)

Advantages vary with AGI

Local (depends)

Tax Equivalent Rates (Federal)

States with income tax

Example Frances, AGI = $250,000

Example Charlie, AGI = $20,000

Bond Rating Agencies

Bond rating agencies

Moody’s (major)

Standard & Poors (major)

Ratings protect bond buyers

Fitch (minor)

Bond ratings and risks

Bond rating criteria

Economy

Financial health

Regulation

Demographics

Risk comparison

Summary

Muni’s fund capital improvements

Two general types of bonds & security Individual & institutional investors

Like all investments, carry risk

Can shelter earned & investment income

Questions

References1. Bond rating criteria, http://www.munibondadvisor.com/rating.htm2. Municipal bond regulation, http://www.sec.gov/info/municipal.shtml3. Municipal bond debt history,

http://www.sec.gov/spotlight/municipalsecurities.shtml4. Definition of municipal bonds, http://www.investinginbonds.com/learnmore.asp?

catid=8&subcatid=53&id=2315. Data for municipal bond holder graph,

http://2.bp.blogspot.com/-Yo8EgQgF3K4/UCuqUb1NpHI/AAAAAAAABbM/oMiAnED24JE/s400/6a01348793456c970c0163064

6. Serial bond table (munis vs. corporate, http://www.investinganswers.com/images/definition%20--%20serial%20bond.gif

7. Map, state income tax rates, http://taxfoundation.org/sites/taxfoundation.org/files/docs/income_rates_large.png

8. Municipal bond rating criteria, http://www.munibondadvisor.com/rating.htm