Who Issues Municipal Bonds?

Municipal bonds (also known as “munis”) are debt securities that are issued by state and local governments.
These are loans made to local governments by investors to fund public works projects such as parks, libraries, bridges and roads, and other infrastructure.
Municipal bond interest is frequently tax-free, making them an appealing investment alternative for those in high tax brackets.
General obligation municipal bonds (GO munis) offer cash flows through project taxes.

Is it true that the federal government issues municipal bonds?

Municipal bonds (also known as municipal debt) are a type of debt “State, city, county, and other local agencies issue debt securities to support day-to-day commitments as well as capital projects such as the construction of schools, roadways, and sewer systems. When you buy municipal bonds, you’re effectively lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or a combination of the two “I am the principle.” The maturity date of a municipal bond (the day on which the bond’s issuer repays the principal) could be years away. Short-term bonds will mature in one to three years, whereas long-term bonds will take a decade or more to maturity.

Municipal bond interest is generally tax-free in the United States. If you live in the state where the bond was issued, the interest may be free from state and local taxes. Bond investors are often looking for a consistent stream of income payments and, when compared to stock investors, are more risk conservative and concerned with preserving rather than developing capital. Due to the tax benefits, tax-exempt municipal bonds typically have lower interest rates than taxable fixed-income assets such as corporate bonds with equal maturities, credit quality, and other characteristics.

States, cities, and counties issue general obligation bonds that are not backed by any assets. General obligations, on the other hand, are backed by the government “the issuer’s “full faith and credit,” which includes the ability to tax inhabitants in order to pay bondholders.
Revenue bonds are backed by earnings from a specific project or source, such as highway tolls or lease fees, rather by the government’s taxing power. Some revenue bonds are available “The term “non-recourse” refers to the fact that bondholders have no claim to the underlying revenue source if the revenue stream ceases to exist.

Municipal borrowers also occasionally issue bonds on behalf of private businesses such as non-profit universities and hospitals. The issuer, who pays the interest and principal on the bonds, often agrees to reimburse these “conduit” borrowers. The issuer is usually not compelled to pay the bonds if the conduit borrower fails to make a payment.

Where can investors find information about municipal bonds?

The Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) website makes municipal securities documentation and data available to the public for free. You will have access to:

Economic reports and events that may have an influence on the municipal bond market are listed on this calendar.

It’s worth noting that many issuers have dedicated websites or webpages for municipal bond investors. Some issuers link to those pages from their EMMA main page. Learn how to use EMMA to locate issuer homepages.

In 2009, the Securities and Exchange Commission recognized EMMA as the official depository for municipal securities disclosures. The MSRB is supervised by the Securities and Exchange Commission (SEC). The MSRB is a self-regulatory body whose objective is to promote a fair and efficient municipal securities market in order to safeguard investors, state and local governments, and other municipal entities, as well as the public interest. The disclosure materials are not reviewed by the SEC or the MSRB before they are posted on EMMA.

What are some of the risks of investing in municipal bonds?

Municipal bonds, like any other investment, carry certain risk. Municipal bond investors are exposed to a number of dangers, including:

Call it a gamble. Call risk refers to the possibility of an issuer repaying a bond before its maturity date, which could happen if interest rates fall, similar to how a homeowner might refinance a mortgage loan to take advantage of reduced rates. When interest rates are constant or rising, bond calls are less likely. Many municipal bonds are “callable,” thus investors who plan to hold a bond to maturity should look into the bond’s call conditions before buying it.

There is a credit risk. This is the risk that the bond issuer will run into financial difficulties, making it difficult or impossible to pay interest and principal in full (the inability to do so is known as “default”). For many bonds, credit ratings are available. Credit ratings attempt to measure a bond’s relative credit risk in comparison to other bonds, yet a high grade does not imply that the bond would never default.

Interest rate risk is a concern. Bonds have a set face value, which is referred to as the “par” value. If bonds are held to maturity, the investor will get the face value of the bond plus interest, which might be fixed or variable. The market price of the bond will grow as interest rates fall and fall as interest rates rise, hence the market value of the bond may be greater or lesser than the par value. Interest rates in the United States have been historically low. If interest rates rise, investors who hold a cheap fixed-rate municipal bond and try to sell it before it matures may lose money due to the bond’s lower market value.

There is a chance of inflation. Inflation is defined as a widespread increase in prices. Inflation diminishes purchasing power, posing a risk to investors who are paid a fixed rate of interest. It may also result in higher interest rates and, as a result, a decrease in the market value of existing bonds.

There’s a danger of running out of cash. This refers to the possibility that investors may be unable to locate an active market for the municipal bond, prohibiting them from buying or selling the bond when they want and at a specific price. Because many investors purchase municipal bonds to hold rather than trade them, the market for a given bond may be less liquid, and quoted values for the same bond may range.

In addition to the risks, what other factors should you consider when investing in municipal bonds?

There are tax implications. Consult a tax specialist to learn more about the bond’s tax ramifications, such as whether it’s subject to the federal alternative minimum tax or qualified for state income tax benefits.

Brokerage commissions. The majority of brokers are compensated by a markup on the bond’s cost to the firm. It’s possible that this markup will be revealed on your confirmation statement. If you are charged a commission, it will appear on your confirmation statement. You should inquire about markups and commissions with your broker.

Are municipal bonds issued by banks?

Banks, like other investors, buy municipal bonds to take advantage of the tax-free interest they can earn. Commercial banks have traditionally been the primary buyers of tax-exempt bonds. With the passing of the Tax Reform Act of 1986 (the “Act”), presently known as section 265(b) of the Internal Revenue Code of 1986, as amended, banks’ demand for municipal bonds shifted (the “Code”).

The carrying cost (the interest expenditure incurred to purchase or carry an inventory of securities) of tax-exempt municipal bonds is not deductible under the Code. This clause effectively eliminates the tax-free benefit of municipal bonds for banks. The Code makes an exception, allowing banks to deduct 80% of the carrying cost of a “qualified tax-exempt obligation.” Bonds must be I issued by a “qualified small issuer,” (ii) issued for public purposes, and (iii) designated as qualified tax-exempt obligations in order to be qualified tax-exempt obligations. A “qualifying small issuer” is defined as an issuer that issues no more than $10 million in tax-exempt bonds in any calendar year. (1) “Bank qualifying bonds” are a term used to describe qualified tax-exempt obligations.

The Act effectively created two types of municipal bonds: bank qualified (also known as “BQ”) and non-bank qualified (also known as “NQ”).

Although banks are allowed to buy non-bank qualifying bonds, they rarely do so.

The rate they’d need to make the investment profitable would be similar to that of taxable bonds.

As a result, issuers can get cheaper rates by selling bonds to investors who will profit from the tax-free status. Banks, on the other hand, have a voracious need for bank qualifying bonds, which are in short supply. As a result, bank qualified bonds have a lower interest rate than non-qualified bonds.

Any difference in interest rates between bank qualified and non-bank qualified bonds has no bearing on the maturities acquired by banks.

The rate differential between bank qualified and non-bank qualified bonds has only been studied in a few research. According to WM Financial Strategies’ analysis of bond purchase proposals and bids, before to 2008, the rate differential on maturities acquired by banks was generally between 10 and 25 basis points (.10 percent to.25 percent). In general, banks bought bonds with shorter maturities (maturing in ten or fewer years). The rate gap soared to as much as 50 basis points during the credit crisis of 2008, and it was applied to maturities as long as twenty years. The rate differential shrank dramatically after the enactment of the American Recovery and Reinvestment Act of 2009, and was often invisible. (1) After these protections expired, the rate differential reverted to a 10-25 basis point range. The corporation tax rate was decreased from 35 percent to 21 percent with the enactment of the Tax Cuts and Jobs Act of 2017, diminishing the benefit of tax-exempt obligations for banks significantly. WM Financial Strategies believes the benefit of bank qualifying bonds is now less than 10 basis points, based on sales observations.

Any issuer proposing to issue less than $10 million in tax-exempt securities in a calendar year may consider bank qualifying the issue to save on interest costs. Issuers who need more than $10 million may be able to use bank qualification by issuing two series of bonds. For a $20,000,000 loan, for example, two $10,000,000 issues could be sold this year and one next year to get two bank eligible issues. Similarly, for a $25 million financing, $10 million in bank qualifying bonds might be sold this year and $15 million in non-bank eligible bonds could be offered next year.

Prior to separating an issue, a thorough cost analysis should be performed.

First, determine if the interest cost savings from bank qualification will be sufficient to balance the additional issuance expenses associated with two bond issues.

Second, in today’s volatile market, even a short delay in a bond sale can result in much higher interest rates, more than offsetting the rate reduction from bank qualification. For instance, from

From October 7 to December 6, 2010, interest rates increased by about 130 basis points (1.30 percent ).

Interest rates increased by 75 basis points from November 16 to December 16, 2016. (0.75 percent ). As a result, even a short-term postponement of a bond issue could be very costly.

(1)The $10 million bank qualifying bond maximum was increased to $30 million under the American Recovery and Reinvestment Act of 2009 (the “2009 Act”).

Furthermore, borrowers who took part in a pool or borrowed from a conduit issuer that issued more than $30 million in a calendar year were eligible for bank qualifying as long as their total tax-exempt financings were less than $30 million.

What is the procedure for obtaining a municipal bond?

Use the services of a municipal securities dealer, such as a broker-dealer or a bank department. A private client broker is a broker who primarily deals with individual investors at a full-service broker-dealer, though they may also be referred to as “financial consultant” or “financial adviser.” The investor must make an explicit order to buy or sell securities in a brokerage account, and purchases and sells of municipal bonds through a broker-dealer must be preceded by a discussion with the investor.

When selling municipal securities, broker-dealers, like all other forms of investment alternatives, have particular responsibilities to investors. For example, when an investor buys or sells a municipal security, a broker-dealer must provide all material information about the investment to the investor and must give a fair and reasonable price. Full-service When broker-dealers buy or sell bonds for investors, they charge a fee. Broker-dealers that act “as principal” (that is, facilitate trades through their own inventory) charge a “mark-up” when selling bonds to investors and a “mark-down” when buying bonds from investors. The fee is called a “commission” when broker-dealers act “as agent” (that is, when they help identify a buyer or seller who deals directly with the investor). The MSRB pamphlet contains useful information on mark-ups and mark-downs, as well as other fees that brokers may charge.

Engage the services of an investment adviser who can identify and trade bonds based on your specific or broad instructions. A registered investment adviser (RIA) manages accounts and acquires and sells securities in line with an investor’s agreed-upon plan without requiring individual consent for each transaction. When you engage an RIA, you should receive written paperwork that specifies both your account’s investment policy and the RIA’s investment procedure. To get a better price, RIAs frequently bundle purchases for multiple clients by trading in larger blocks. Account holders are frequently charged a management fee by RIAs. Some advisers price differently based on the interest rate environment and the interest profits that come with it.
A self-managed account allows you to trade straight online. Another alternative for investors who wish to purchase and sell muni bonds on their own is to use a self-managed account, commonly known as “direct online trading,” which allows them to do so without the help of a private client broker or RIA. This is a broker-dealer account that charges commissions, mark-ups, and markdowns just like a full-service brokerage account. The firm has the same responsibilities to investors as any other broker-dealer, but it may perform them in a different way. For example, disclosure regarding a certain bond could be done only through electronic means, with no interaction with a private client broker. A self-managed account necessitates that the investor comprehend the benefits and drawbacks of each transaction.
Purchase or sell municipal bond mutual fund shares. Another way to participate in the municipal bond market is to purchase shares in a mutual fund that invests in muni bonds. Municipal bond mutual funds, which invest entirely or partially in municipal bonds, can be a good method to diversify your portfolio. While municipal bond funds can provide built-in diversification, you do not own the bonds directly. Instead, you hold a piece of the fund’s stock. This is significant because interest rate fluctuations have a different impact on municipal bond mutual fund owners than they do on direct municipal bond owners. Many investors who purchase individual municipal bonds aim to retain them until they mature, despite the fact that bond market values fluctuate between purchase and maturity. Mutual fund managers, on the other hand, are aiming for a stable or rising share price. If rising interest rates cause the market value of bonds in a mutual fund’s portfolio to drop, some of those bonds will be sold at a loss to avoid additional losses and pay for share withdrawals. You are subject to potential swings in the mutual fund’s value as a mutual fund stakeholder.
Purchase or sell municipal bond exchange-traded funds (ETF). ETFs are a hybrid of mutual funds and traditional equities. The majority of municipal bond ETFs are structured to track an index. The share price of a municipal bond ETF can fluctuate from the ETF’s underlying net asset value (NAV) because it trades like a stock. This can add a layer of volatility to the price of a municipal bond ETF that a municipal bond mutual fund does not have. When an investor buys or sells shares of a municipal bond ETF, the transaction takes place over the exchange between investors (buyers and sellers). When an investor buys or sells shares in a municipal bond mutual fund, on the other hand, the transaction is handled directly by the mutual fund company. Municipal bond ETFs trade like stocks during market hours. A single purchase or sale of municipal bond mutual funds is permitted per day.

Expenses for mutual funds and ETFs include sales commissions, deferred sales commissions, and a variety of shareholder and running fees. FINRA’s Fund Analyzer allows you to compare fund fees and expenses.

Regardless of how you participate in the municipal bond market, the MSRB advises that you think about your investment needs and get written information from your financial professional regarding how fees are charged and which costs apply to your account before investing in a muni bond.

Bonds are paid for by taxpayers.

Putting “no tax increase” in front of “bonds” is designed to dampen opposition to increased taxes, as it is with many political words. But, to be clear, there is no category of bonds issued by school districts that does not result in an increase in your taxes. Bonds with no tax increase raise your taxes.

How? Bonds are frequently issued by school districts to fund capital projects such as the construction of new facilities or the renovation of existing infrastructure. The bonds are paid off over time by the taxpayers, usually through an increase in their property taxes. Bonds are issued for a set period of time, and when they are paid off, the tax payments of the taxpayers are reduced.

Do you have to disclose interest on municipal bonds?

Even if the interest on your tax-free municipal bonds isn’t taxable, you must still report it to the IRS. The bond issuer will send you a Form 1099-INT, Interest Income, at tax time. You’ll find the tax-exempt interest you earned during the tax year in Box 8, Tax-Exempt Interest. This information will be entered into Form 1040, line 2a, which is designed for this sort of interest.

Municipal bond rates fluctuate, just like other types of investments.

However, you can earn income at significantly higher rates than other investments, with rates as high as 5% in some situations. The fact that you can acquire them and earn greater interest rates without being pushed into a higher tax bracket is also a plus.

What is the purpose of government bonds?

Government bonds are used by governments to raise funds for projects or daily operations. Throughout the year, the US Treasury Department holds auctions to sell the issued bonds. The secondary market is where some Treasury bonds are sold. Individual investors can purchase and sell previously issued bonds through this marketplace if they work with a financial institution or broker. Treasuries can be purchased from the US Treasury, brokers, and exchange-traded funds (ETFs), which are a collection of assets.

Why does a business issue bonds?

Bonds are one way for businesses to raise funds. The investor agrees to contribute the firm a specified amount of money for a specific period of time in exchange for a given amount of money. In exchange, the investor receives interest payments on a regular basis. The corporation repays the investor when the bond reaches its maturity date.

What is the source of bond money?

A bond is just a debt that a firm takes out. Rather than going to a bank, the company obtains funds from investors who purchase its bonds. The corporation pays an interest coupon in exchange for the capital, which is the annual interest rate paid on a bond stated as a percentage of the face value. The interest is paid at preset periods (typically annually or semiannually) and the principal is returned on the maturity date, bringing the loan to a close.

What are the economic benefits of financing with municipal bonds?

Municipal bonds are typically used to fund capital projects rather than recurring expenses (such as salaries or government benefits).
Schools, acute care hospitals, roads, highways, and bridges; airports; subways; seaports and marine terminals; water and wastewater facilities; multi-family housing; libraries and town halls; electric power and natural gas equipment for city-owned utilities; and other public projects are all included in these investments.
In the last decade, $2 trillion in infrastructure construction has been financed with tax-exempt municipal bonds. 1
Municipal bonds account for over two-thirds of the nation’s essential infrastructure. 2

Who buys municipal bonds?

Individuals own about 72 percent of bonds, either personally or through mutual funds and other vehicles.
Households with incomes of less than $200,000 receive roughly 40% of municipal bond interest. 4
Businesses, particularly property and liability and life insurance companies, but also banks, own about 25% of bonds.

Why do investors buy municipal bonds?

The municipal bond market is known for its stability, which attracts investors.
Bonds have been issued by state and municipal governments for centuries, and they are a well-known and well-regulated financial tool.
Investors benefit from the exclusion of interest from federal income tax.
Investors, on the other hand, accept a reduced rate of return on the bond in exchange for the tax benefit, which reduces or eliminates any tax “windfall.”

What are the financial benefits of financing with municipal bonds?

Municipal bond-financed projects cost $495 billion less in the last decade than taxable debt-financed projects. 6

How do bonds promote fiscal responsibility?

Bonds are approved by a voter referendum or a governmental body’s affirmative vote (a city council, county council, utility board, or the like).
While the federal debt has nearly doubled in real terms and as a percentage of GDP over the last decade, state and municipal debt has stayed constant. 7