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Intro to Government andMunicipal Debt

US Government Debt

32010 Kaplan, Inc.

US Government Debt

US Government securities

The largest issuer of debt in the United States

The safest debt in terms of default risk

Governments can only tax at their level ofissue

Federal interest taxed at the federal level Tax exempt at the state and local level

42010 Kaplan, Inc.

Nonmarketable Government Debt

EE bonds Purchased at a discount

Fixed interest rate for up to 30 years

HH bonds Purchased at face ($500 to $10,000)

No longer issued as of August 2004

Fixed rate of interest for up to 20 years

I Bonds Purchased at face ($50 to $5,000)

Interest paid upon redemption of bond

Interest tied to inflation for up to 30 years

US Government Debt

52010 Kaplan, Inc.

Marketable Government Debt(Negotiable)

T-bills

Maturities: 4, 13, 26, 52 weeks

Priced at discountmature at par

Noncallable

US Government Debt

62010 Kaplan, Inc.

T-notes

Maturities: 210 years

$1,000 denomination

T-bonds

Maturities: greater than 10 years, up to 30 years $1,000 denomination

US Government Debt

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Municipal Bonds

82010 Kaplan, Inc.

Municipal securities Debt issued by a form of government other

than the federal government

Doctrine of reciprocity

Interest taxed at the state and local level

Tax exempt at the federal level

Municipal Bonds

92010 Kaplan, Inc.

Types

General obligation (GO)

Used to build things to benefit a community

Schools, libraries, jails

Backed by full faith and credit of issuer

Voter approval required

Municipal Bonds

102010 Kaplan, Inc.

Revenue bonds

Backed by user fees Toll bridges, turnpikes, airport terminals

Voter approval not required

Municipal Bonds

112010 Kaplan, Inc.

IDRs backed by corporate credit

Issued by a municipality for the benefit of acorporation

Backed by corporate credit

Municipal Bonds

122010 Kaplan, Inc.

Insurance

Does not insure market risk

MBIAMunicipal Bond InvestorAssurance Corporation

AMBACIndemnity

Corporation

Municipal Bonds

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132010 Kaplan, Inc.

Tax-Free Equivalent Yield (TFEY)

A client whose tax bracket is 30% owns a

10% corporate bond

$100.00 interest

30.00 tax

$70.00 after tax

For this investor:

The corporate bonds tax-free equivalent yield(TFEY) is 7%

Municipal Bonds

142010 Kaplan, Inc.

Formula for Tax-Free Equivalent yield

Corporate yield (1 TB) = Muni Equivalent

10% (1 .30)

10% .70 = 7%

Municipal Bonds

152010 Kaplan, Inc.

= Corporate %

= 10 %

Formula for Taxable Equivalent Yield

Muni %

(1 TB)

7%

1 .30

7%

.70

Municipal Bonds

162010 Kaplan, Inc.

YesYesCorporate andagencies

NoNoUS territories

May be taxableNoMunicipal debt

NoYesUS governmentdirect debt

State/Local TaxFederal TaxDebt Instrument

Summary: taxation of interest

Municipal Bonds