Chapter 1.1 Flashcards
Municipal Bond Basics (5 cards)
Municipal Bonds
Bonds issued by State and local government entities such as cities, counties, school districts, and the state
General Obligation Bonds
- Backed by Taxes(Income, real estate, sales).
- Backed by the taxing power of the municipality
- Issued for facilities that benefit the public.
- Schools, Libraries, City Hall
- Because they are backed by taxes paid by the public:
- Voter Approval is required before issuance
- Statutory debt limits apply - No Flow of funds provision
- No Protective Covenants
- Not Callable
Revenue Bonds
- Primarily backed by user charges(Toll roads, bridges, airport fees, etc.)
- Also can be backed by lease payments, license fees, and special taxes such as cigarettes, liquor, etc.(known as excise tax).
- Backed by protective Convenants–>Which only apply to revenue bonds.
- Flow of funds provision - determines the priority of incoming revenues.
- No voter approval is required. A feasibility study is required to determine self-sustainability.
- No Statutory debt limits
Municipal Notes
- Note = “Short-term”
- Notes are securities that have short-term maturities
- Municipal notes are used for interim or temporary financing
- When thinking of municipal notes think of:
- TANS, RANS, TRANS, BANS
- Tax anticipation, revenue anticipation, tax and revenue anticipation, bond anticipation.
Interest on Municipal Bonds
Federal Income Tax: Interest on municipal bonds is exempt from all federal income tax. The federal exempt status of municipal bond interest is based on the doctrine of “Reciprocal Immunity” which was applied by the U.S. Supreme Court.
State Income Tax: Most states, but not all, exempt municipal bond interest from taxation within the state of issue. However, many states tax the interest on bonds issued by other states. One exception is the Commonwealth of Puerto Rico Bonds. Interest on such bonds is exempt from all Federal, State, and Local Taxes(Triple exempt).
