CFP

Characteristics, Uses and Taxation of Investments - Types of Municipal Bonds


What follows is a brief discussion of the major types of municipal bonds and the source of revenue for their coupon payments.
  1. General Obligation (GO) - such bonds are backed by the creditworthiness of the issuer which has taxing power. Voter approval is prerequisite for issuance. These issues are the safest and yields tend to be lower as a result. Examples of issuers are New York City, the State of Missouri, etc.
  2. Revenue - interest payments of these bonds are secured by a specific revenue stream, e.g. tolls or other user fees. Because these bonds are riskier than general obligation bonds, their yields tend to be higher for similar maturities.
  3. Short Term -
    1. Tax Anticipation Notes (TANs)
    2. Revenue Anticipation Notes (RANs)
    3. Bond Anticipation Notes (BANs)
  4. Exotic/Unique - these are usually some variation on the foregoing.
    1. Certificates of Participation -
    2. Private Activity Bonds-these are generally part of a state or local government bond issue. They satisfy two (2) criteria:
      • More than ten percent of the proceeds of the issue are for private business use.
      • More than ten percent of the principal or interest is either secured by an interest in property designated for private business use or derived for payments for property earmarked for private business use.
Bonds issued for a sports stadium would be an example. Tax-exempt interest from these types of bonds is a preference item in the calculation of the Alternative Minimum Tax (AMT) and may cause a taxpayer to be subject to the AMT.


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