Sometimes munis are issued under special circumstances, which merit discussion here:

  • Special tax bond: Secured by a special tax, such as a gasoline tax.

  • Special assessment bond: Secured by the taxes of the community benefiting from the bond-funded project, such as a proposed library.

  • Moral obligation bond: A state pledges, without legal obligation, to make up a revenue bond's shortfalls through a debt service reserve fund; this type of bond is less legally binding but otherwise similar to a double-barreled bond (see below).

  • Advance-refunding: A structure under which new bonds are issued to repay an outstanding bond issue prior to its first call date. Proceeds of the new issue are invested in government securities, then the interest and principal repayments on these securities are used to repay the old issue.

  • Double-barreled bond: Two separate entities make a financial commitment. The project's revenues provide the initial security, and the secondary guarantee is provided by the general obligation taxing powers of the issuer.

  • Taxable bond: Because the federal government will not subsidize activities that do not benefit the public at large, sometimes municipalities must issue taxable bonds. Building new stadiums, refunding a refunded issue and replenishing a municipal employee pension plan are typical uses for taxable munis.

  • Original issue discount (OID) bond: Issued at a dollar price less than par; the difference between the issue price and par is treated as tax-exempt income rather than a capital gain if the bonds are held to maturity, due to special treatment under federal law.

  • Zero-coupon bond: The investor receives one payment at maturity equal to the principal invested plus compound interest at a stated yield; this contrasts with the muni convention of semi-annual coupon payments. Zero-coupon munis are a $10 billion per year market, which is small compared to the market for zero-coupon T-bonds or corporate bonds. Still, it is growing quickly as investors are attracted to the low cost of entry inherent in zero-coupons combined with the tax exemptions of munis.


Introduction

Related Articles
  1. Investing

    Avoid Tricky Tax Issues On Municipal Bonds

    Learn the rules every investor should know before buying into this "tax-free" investment.
  2. Financial Advisor

    Top 4 Ways to Avoid Muni Bond Mistakes

    Muni bonds are often perceived as safe investments. But it's important to do some thorough research before investing.
  3. Investing

    How Are Zero-Coupon Municipal Bonds Taxed?

    What every investor needs to know about taxes and zero-coupon muni bonds.
  4. Financial Advisor

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
  5. Investing

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  6. Investing

    Higher Taxes? No Sweat With Munis

    Municipal bonds are a great way to shield your portfolio from a growing tax burden.
  7. Investing

    Taxation Rules for Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  8. Investing

    An Unprecedented Opportunity In Municipal Bonds

    As interest rate/taper and default fears have taken hold, investors have fled muni bonds in spades. That outflow could be just what value hunters are looking for.
Frequently Asked Questions
  1. What is the formula for calculating the current ratio?

    Find out how to calculate the current ratio and what that result can tell you about a potential investment.
  2. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based.
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The concept of CAGR is relatively straightforward and requires only three primary inputs: an investments beginning value, ...
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors with insight into how efficiently a company (or more specifically, ...
Trading Center