Securities issued by State and Local Government

Municipal securities (or munis):
Issued by state and local governments in the US but NOT free of credit risk.
Not all munis are tax-exempt but some taxable. Income is tax-exempt but capital gains are taxed.

Two types of munis
General obligations (Tax-backed debt obligations)
· backed by the full taxing power of the issuing authority and so is safer

Revenue bonds
· backed only by the cash flow of the project with no recourse to the issuing authority
· pay P & S only if sufficient revenue generated and usually higher yields than General obligations.

Tax exempt rate = Equivalent rate for taxable bond x (1 - Tax rate)

Special structures for munis:
· Insured bonds- insured by third party, commonly for revenue market
· Prerefunded bond-refunded prior to their rist date of call, used to buy treasury products, little or no credit risk, safest type of munis.