Syndicate
Municipal Bonds
As with the anonymous societies, the state governments, counties and municipalities can emit debentures and bonds. The funds proceeding from municipal bond emissions can be designated to the financing of the general budgets or for special projects.
The key characteristics of the municipal bonds, known popularly as minis, is that, in certain cases, they are exempted from federal taxes.
That a bond is or not exempted depends on the destination given to the funds by the issuing organism. If you are going to buy municipal bonds because you want to benefit from the tax exemption, make sure first that they are really free from tax burden. In some cases, the interests from the Munis are also exempted from state and municipal taxes if they live in the same jurisdiction in which they were issued.
As happens with the debentures of societies, the municipal bonds present an ample variety in the issues of security and liquidity. The Munis may have a high qualification or may be very speculative, all depends on the way you use them to back up the payment of the interests.
There are two basic types of municipal bonds: the bonds of general responsibility and the bonds payable with income. The bond of general responsibility are guaranteed by the solvency of the official organism that issues them, or said in a more simple way, by its total collecting capacity. These types of bonds usually inspire more confidence to investors. A public organism to execute some special public projects as, for example, issues the bonds payable with income an airport, a sewerage system or a highway. These bonds have less credit from part of the investors due that the payment of the principal and of the interests are backed by the income produced by the project in question.
If well most of the issued bonds of state and local public organisms represent very secure investments, the economic situation has affected negatively to the confidence that the investors had put on many of public issuers.
To increase the qualification of their bonds, what most of these organisms do is to insure the payment of the principal and the interests through insurance companies that are specialized in this field, as are MBIA, FFGIC and BIA.
There was a time in which the prices of municipal bonds didn’t fluctuate so much and, in consequence, very few questioned its security; but several factors have contributed for this situation to change. The almost bankruptcy of the City Hall of New York at the beginning of the seventies and the similar problems of the orange county (California) in the eighties, put in evidence the need to inspect thoroughly the finances of all the issuing organisms. The fact of the strong fluctuations on the type of interests also contributed to the extreme ups and downs of prices of the municipal bonds.
The tributary reform law of 1986 and its following “arrangements” introduced a series of changes that made of the municipal bonds one of the last open fiscal shelters for the small investors. The first significant change was the reduction of the superior limits of the tax rate band required for fiscal revision (from 50% to 39%). The fact that a security is tax-free makes it less interesting for the individual investor. Naturally, the prices of the municipal bonds have been adjusted taking in account those changes.
On the other hand, the law eliminates the existing incentives for the financial institutions to invest in municipal securities.
Traditionally, banks and other financial institutions, dominated the emission market of tax-exempted securities with an average term (7 to 20 years). With the stronger pretenders “out of the game”, maybe the individual investors can know do-good investments in this type of tax-exempted emissions. The impact of these factors has already had an effect on the market.
The tax exempted securities world is quite complex. For it, maybe the best way for individual investors that want to invest in municipal bonds would be to put their money in specialized mutual funds for this class of securities.