1. Municipal Securities Chapter 8

2. Municipal Securities tax-backed debt  secured by tax revenue  types general obligation debt  unlimited – secured by issuer’s unlimited taxing power  limited – statutory limit on tax rates that can service debt moral obligation bonds – requires legislative approval to appropriate funds (not legally binding obligation of state) Debt with Public Credit Enhancement  legally enforceable obligation  often used for debt obligations of a state’s school systems

3. Municipal Securities Revenue bonds  for project or enterprise financings – bondholders are pledged revenues generated by project financed  revenues put into revenue fund and then disbursed to following funds: operation and maintenance fund sinking fund debt service reserve fund renewal and replacement fund reserve maintenance fund surplus fund  operations have priority over servicing debt

4. Hybrid Munis Insured bonds  secured by issuer’s revenue and insurance company  can be insured by monoline or multiline insurers Bank-backed munis  letter of credit agreement  irrevocable line of credit  revolving line of credit Refunded bonds  portfolio of securities guaranteed by US government placed in trust so that CFs match those of municipality’s obligation Structured/Asset-Backed bonds

5. Municipal Derivative Securities created by separating interest and principal pmts into different classes  bond classes derive their value from underlying fixed-rate muni  development parallels that in taxable mkt (Ch. 11) types  floaters/inverse floaters  strips and partial strips

6. Floaters/Inverse Floaters

7. sum of rate on floater and inverse floater adds to rate on fixed rate security  if mkt rates fall, rates on floater will fall and rates on inverse floater will increase mkt for inverse floaters not very liquid use of floaters/inverse floaters allows investor to create synthetic fixed-rate bond with option to separate in future  option for investors allows issuer to drop yield some

8. Credit Risk Moody’s and S&P credit concerns because of past defaults and “innovative” ways to finance issues GO bonds  overall debt structure  issuer’s ability to maintain sound budgetary policy  specific local taxes and intergovernmental revenues available to issuer  issuer’s overall socioeconomic environment revenue bonds  in general, determination of whether financed project will generate sufficient cash flows

9. Yields on Munis investor in 40% marginal bracket considering muni with yield of 6.5%