Municipal Securities - Introduction
A municipal security, or muni, is a bond issued by a state or local government. In this case, "local government" is defined rather broadly: it can mean a city, town or county, but it can also mean a school district or water district. It can mean authorities dedicated to such public works projects as highway improvement, airport expansion, hospital or low-income housing construction, or the purchase of land for a new library. Neither-fish-nor-fowl entities like Puerto Rico, Guam and the
Municipal securities have the benefit of being tax-exempt at the federal level in all cases, and the state and local levels under certain circumstances. Meanwhile, government bonds - the legal or moral obligations of the federal government - are tax-exempt at the municipal level but not at the federal level.
It may sound unfair, but Uncle Sam can tax any gains you make in the course of lending him money. Corporate bonds are taxable at all levels, but they typically have higher interest rates to compensate. Later on you will see why it is important to know your client's tax rate so you can determine if she is better off with a 10%-yielding corporate debenture, an 8% T-note or a 5% muni.
Although munis are issued by governments, they are not known in financial parlance as "government bonds". Government bonds are issued by the federal government and its agencies. Munis are a different class altogether and should never be referred to as "government bonds".
For more, see The Basics of Municipal Bonds.
There are two ways of quoting a muni price:
- Basis price: Sometimes called "yield price"; this price is expressed in terms of the yield to be realized by the purchaser.
- Dollar price: Expressed in terms of dollars per $100 par value; it may be the transaction price or may be derived from the basis price.
Not only is "dollar price" rarely used, today it is actually an inaccurate term. Munis are normally denominated in $5,000 increments, not $100.