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Answers
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- What are municipal
bonds?
Municipal bonds are securities issued by state and
local governments, their agencies, and/or political
subdivisions to finance public improvement projects.
The bond issuer borrows needed money by selling municipal
bonds. The investors who buy municipal bonds become
creditors and are essentially loaning money to the
issuer to fund public projects. Each bond is, in effect,
an IOU representing the issuer's promise to repay
the borrowed amount in a stated period of time. In
exchange for the use of the money, the issuer usually
also makes interest payments to the bondholders until
the bonds are repaid.
- What is meant
by tax exemption?
Traditionally, municipal bond's principal and interest
are exempt from federal income taxes under section
103(a)(1) of the Internal Revenue Code. In addition,
they are often exempt from the income taxes of the
state and locality in which the issuing municipality,
political subdivision or agency is located.
Interest paid on bonds issued by the City of New York
are triple tax-exempt for residents of the City.
This means the interest is usually exempt from federal, state,
and city income taxes.
- Are municipal
bonds for me?
Tax-exempt bonds are not necessarily a suitable investment
for everyone. The extent of their suitability depends
on one's income, tax bracket, investment objectives
and other factors. Therefore, prior to buying municipal
bonds, one should consult with a qualified tax or
investment advisor.
- What are the types
of municipal bonds?
Municipal bonds vary by the type of security pledged
for repayment. Among the most common are the following:
General Obligation
Bonds:
General obligation (GO) bonds are backed by the
issuer's pledge of its full faith, credit and taxing
power for the payment of the bond. GOs are generally
viewed as the most secure type of municipal security
and typically finance public projects such as schools,
parks, libraries, roads and city buildings.
Revenue Bonds:
Revenue bonds are payable from revenue derived from
tolls, charges, fees or rents paid by those who
use the facilities constructed with the proceeds
of the bonds. For example, a water revenue bond
would typically be payable from water charges and
other revenues of the water system.
Variable Rate
Demand Bonds:
Commonly called "floaters," variable rate
demand bonds are long-term municipal bonds that
act like short-term notes because they reflect short-term
interest rates and offer short-term liquidity. They
are typically secured by an irrevocable letter of
credit or a liquidity facility from a domestic
or foreign bank.
Housing Revenue
Bonds:
Housing bonds are payable from mortgage loan payments
and may be additionally secured by various types
of insurance and/or state, federal or local support
programs.
Special Tax Bonds:
Special tax bonds are payable only from the proceeds
of a special tax, such as highway bonds payable
solely from a gasoline tax.
Lease Revenue
Bonds:
Lease revenue bonds are secured
and payable from lease rental payments made by a
municipal entity. Examples: parking lots, office
buildings.
- Who buys municipal
bonds?
Individual investors, pension funds, mutual fund companies,
insurance companies, and other corporations all buy
municipal bonds.
- Can I purchase
bonds directly from the City?
No. Municipal bonds sold by the City can be purchased
from registered broker-dealers nationwide.
- My bond matured
at least 6 months ago and I was unable to redeem it.
Do I earn interest on principal for the period during
which I did not redeem my bond?
No. Interest earned on unredeemed principal and/or
interest becomes property of the City. The investor
will only receive the stated principal and/or interest
amount stated on the bond. It is incumbent upon the
investor to present the bond for payment/redemption
in a timely manner to the City's Fiscal Agent.
- How do I redeem
bonds that matured more than 3 years ago?
The proceeds on bonds which have matured more than
three years ago, have been escheated to the New York
State Comptroller's Office of Unclaimed Funds. The
bondholder should contact that office to begin the
claim process at the following:
New York State Comptroller
Office of Unclaimed Funds
110 State Street
Albany, New York 12236-0001
(800) 221-9311
- How are municipal
securities rated?
The three major rating agencies
that evaluate municipal credit are Moody's Investors
Service, Standard & Poor's Corporation (S&P),
and Fitch Investors Service. They research the issuer's
ability to repay debt and then assign a rating symbol
which ranks the quality of the bonds. The chart
below describes the rating symbols used for bonds
and notes.
Bonds
|
Moody's |
S&P |
Fitch |
Definition |
| Aaa |
AAA |
AAA |
Highest quality;
extraordinary ability to repay principal
and interest. |
| Aa |
AA |
AA |
High quality; very
strong capacity to repay. |
| A |
A |
A |
Upper medium grade
quality; strong capacity to repay. |
| Ba |
BB |
BB |
Speculative; repayment protection moderate. |
| Baa |
BBB |
BBB |
Medium grade quality;
adequate capacity to repay. |
|
| Ba |
BB |
BB |
Speculative; repayment
protection moderate. |
| B |
B |
B |
Highly speculative;
lightly protected. |
| Caa |
CCC |
CCC |
Of poor standing;
possibility of default |
| Ca |
CC |
CC |
Minimally protected;
default probable. |
| C |
C |
C |
In actual or imminent
default |
| D |
D |
|
In default |
Bond ratings listed
above the line are considered "investment grade."
Those below are considered speculative or "below
investment grade."
Notes
| Moody's |
S&P |
Fitch |
Definition |
MIG1
/VMIG1 |
SP-1+ |
F-1+ |
Best quality;Strong
protection by established
cash flows, superior liquidity support or
broad-based access to the market for refinance. |
|
SP-1 |
F-1 |
Very strong or strong capacity
to pay
principal and interest. |
MIG2
/VMIG2 |
|
|
High quality.Margins of protection
are ample. |
|
SP-2 |
F-2 |
Satisfactory capacity to pay
principal and
interest. |
|
MIG3
/VMIG3 |
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Favorable quality. All security
elements are
accounted for but without the strength of
higher grades. Liquidity and cash flow
protection may be narrow.Market access for
refinancing likely to be less established. |
|
SP-3 |
F-3 |
Speculative capacity to pay
principal and
interest |
MIG4
/VMIG4 |
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Adequate quality. Required protection
is present. Although no distinctly or predominantly
speculative,
there is specific risk |
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