matthew conde. “galloping gertie” built and collapsed in 1940 second bridge built in1950 (so...
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Municipal Bonds Types and Characteristics
Matthew Conde
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“Galloping Gertie” Built and Collapsed in 1940
Second Bridge Built in1950 (so far, so good)
Tacoma Narrows Bridge
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2007 – Another Bridge Added
Bond Proceeds - $800 million Motor Vehicle Fund - $39 million Investment Income - $10 million
Source: Tacoma Narrows Bridge Project Financial Plan Version 1.0, page 9, WSDOT, July 2002.
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Common Bond-Backed Projects:
Financing Infrastructure
Road Improvement Education
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Additional Examples
Public Utilities
Publicly-Owned Airports
Mass Transit
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“For the Public Good” criteria Determination Subject to IRS Review
Taxable or Non-Taxable?
Sports Arenas are an example of a taxed Municipal Bond
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Repayment based on ability to tax Considered the safest type of Municipal Bond
General Obligation Munis
Low Income Housing
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Repayment based on revenues from project Not as safe due to potential volatility of revenues
Revenue Munis
Oil Drilling
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Enacted to Reduce Municipal Borrowing Costs
Direct Payment BABs: 35% subsidy of interest paid by the issuer
Tax Credit BABs: Provides participating bondholders with tax credit
Build America Bonds
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Current Yields
From wellsfargoadvantagefunds.com 2011 outlook
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Tax exempt (Single, Double, Triple) Capital Gains are subject to tax
Tax Advantages
Your federal income tax bracketIs a municipal bond fund
appropriate?
15% Unlikely
25% Likely
28% Very likely
33% Highly likely
35% Highly likely
From personal.fidelity.com
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There are limits to bond-related taxation Municipal bonds may carry social
implications
More About Taxes
Vs.
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“Providing tax exemptions to residents of issuing municipalities creates economic harm”
How would you support or refute this claim?
Discussion Question
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1988: Muni tax exemptions not protected 2008 – Department of Revenue of Kentucky
v. Davis : “Tax structure is one of the tools of competition”
The Supreme Court Weighs In
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Understanding Bond Risks
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Bond related debt continues to grow….
A Muni Bubble???
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Liquidity Risk
Funding Liquidity – Issuer will be unable to meet liabilities when they come due, or will only meet in unfavorable economic circumstances
Asset Liquidity – Asset cannot be sold due to lack of market liquidity
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Municipal Bonds finance infrastructure Investors are attracted to tax exemptions;
thus they have (relatively) lower return requirements
G.O. Munis are backed by tax revenues, Revenue Munis by project revenues
Even safe investment vehicles have social implications and risks attached
If You Remember Anything…