Bond Guide | Municipal Bond

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  BOND GUIDE  Thank you for requesting our Bond Guide. Hennion & Walsh is an independent financial services firm specializing in Municipal Bonds. It is our heritage, it is who we are. We have been helping individual investors build strong bond portfolios since 1990. We are committed to helping the individual investor learn more about their investments. If you have any additional questions, please feel free to call us at (800) 836-8240.  1   1 Municipal Bonds – The Basics Municipal Bonds are issued by state and local governments to raise money for major capital projects. This includes the building of infrastructure such as bridges, roads, hospitals, schools, sewer systems, stadiums, airports, power plants, and prisons, or to provide for other needs of local government.Virtually all states and local governments issue municipal bonds from time to time. The $2.7 trillion* municipal bond market consists of over 50,000 issuers across the country. ...interest income is exempt from state and local taxes if the investor lives in the same state as the bond issuer. Like any borrower, local governments pay interest on municipal bonds to investors that own or hold them. Interest on municipal bonds is typically paid every 6 months. Interest earned from municipal bonds is exempt from federal income taxes, and, depending on the residence of the bond holder, may also be free of state and local taxes. Investors have viewed municipal bonds as safe investments because their default rate has historically been less than 1%**. As a general rule, interest income is exempt from state and local taxes if the investor lives in the same state as the bond issuer. For example, a New Jersey resident owning a New Jersey State municipal bond would not have to pay federal or state taxes on the interest received from this bond.Investors have viewed municipal bonds as safe investments because rated investment grade municipal bonds have had an average cumulative 10-year default rate of just 0.09% between 1970 and 2015**. The reason for this low historical rate of default is that many municipal bonds are backed by the unlimited taxing power of the local government issuing them. Such bonds are referred to as “General Obligation Bonds” (or “GO”), and are backed by the full faith, credit and taxing power (i.e. income, property, sales, and vehicle taxes, tolls, special levies, etc.) of an issuer*** to pay back the principal and interest owed to bondholders. General Obligation Bonds thus offer a measure of safety to bondholders because unlike corporations, local governments rarely cease to exist and dissolve altogether. As long as they exist, municipalities should be able to generate tax revenue sufficient to meet their obligations to bondholders.Another type of municipal bond is a “Revenue bond” which is backed not by taxes, but by revenue (i.e. toll revenue or electric power revenue). The safety of a bond will vary based on the revenue streams backing it, which is why we recommend working closely with a municipal bond expert. * Lazard Insights, December 15, 2009** Moody’s Investor Service, “US Municipal Bond Defaults and Recoveries, 1970-2015”, May 31, 2016*** Municipal Securities Rule Making Board Website  2 Municipal Bonds: Five Must-ask Questions For Investors Q. What is a municipal bond? A. A municipal bond is essentially a loan to the government.   It is a debt instrument issued by a state, county, city or other government entity to raise money for general or specific purposes. The issuer agrees to pay the bondholder interest on the principal. The interest rate is also called the “coupon rate” and is usually paid twice a year. These payments continue until the bond’s maturity date, at which point the issuer repays the principal (also called “face value” or “par value”) in full. Most municipal bonds are tax-free, so the bondholder doesn’t have to pay taxes on their regular interest payments. There are two kinds of tax-free municipal bonds: general obligation bonds and revenue bonds. General obligation bonds raise money for projects that benefit the community at large, and are backed by a government’s full faith and credit and unlimited taxing power – in short, by their ability to tax. In contrast, revenue bonds fund specific projects and are backed solely by the revenues generated from those projects. Insured bonds carry an extra degree of security from risk...Example:  A general obligation bond may be issued for a large, non-revenue producing capital project such as a public building or a health facility. A revenue bond may be issued by a public transit authority to finance the construction of a new subway line.Insured bonds carry an extra degree of security from risk because they are insured by a third party. If the bond issuer goes into default, the insurer will continue to make regular interest payments to bondholders and will redeem the principal upon maturity. Alternatively, insurers may pay off the bonds at a future call date.
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