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What is a municipal bond (muni)

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    Benton Li
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Who issue Munis?

  • Local/State government: bonds paid back via robbery tax.
  • Municipal Utilities: funds used to provide essential services with a monopoly or near-monopoly. Bonds are paid back by charging the customers. (e.g. Columbia University)
  • Competitive enterprises: nonprofit entities that provide important public services like helth and education. (e.g. Jericho High School)

Overview of munis:

  • Big tax advantage: Municipal bonds are free from Federal, state, and city income taxes for local residents. Consider it a big win.
  • Mostly held by individuals because of the tax advantage.
  • Almost as safe as govies. Sometimes issuer may pull a Detroit.
  • Issued for common good :))
  • Banks hold a bunch of them from 2012 to 2017. They hold less since the fat tax cut in 2018

2 Types:

  • General Obligation (GO) bonds
    • Bond repaid with tax
    • Basically backed by the taxing power
    • Sometimes need a referendum
  • Revenue bonds:
    • Bond repaid with revenues
    • Examples include airports, hospitals, etc.

Advanced Reading

GO Bonds:

GO Bonds subtypes (ranked by riskiness):

  • Double-barreled bonds: a combination of revenue bonds and go bonds → can generate some revenue to repay the debt
  • Unlimited but with dedicated tax bonds: A specific tax will be used to repay the bond
  • Unlimited tax bonds: the baddest badass, how can you rob tax people like that
  • Limited tax bonds: still robs people, but there’s a limit on how much you can raise tax

GO Bond analysis:

  • Debt level:
    • How much existing debt does the issuer have?
    • What’s the net GO debt per capita?
    • Does the issuer have other liabilities like lease debt and unfunded pension?
  • Value of taxable properties: ofc more the better
  • Local economy:
    • employment rate
    • population
    • building permit issuance
  • Budget operations: do you have a good budget/surplus/deficit? I mean, you better not be corrupted
  • Revenue structure: more diverse the better

Revenue Bonds:

Subtypes include airport bond, higher education bond, hospital bond, water revenue bond, toll revenue bond, etc.

Rev Bond analysis:

  • Source of revenues
  • Flow-of-fund structure: gross & net revenue pledge
  • Covenants

Psudo munis:

  • Muni notes (60 days to 12 months)
  • Muni commercial paper (CP), (Up to 270 days, typically 30-50 days)

Useful Bloomberg Terminal Commands

  • SRCH