Series 7

By Investopedia AAA

Municipal Securities - Special Munis

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

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