Hybrid municipal bonds.
Several other variations of munis are issued with features added to a typical GO or revenue bond. Examples are listed below.
Several other variations of munis are issued with features added to a typical GO or revenue bond. Examples are listed below.
Double-barreled bonds: Double-barreled bonds are munis that carry both a revenue and general obligation pledge. The bonds receive backing from both revenue from the project and if necessary the municipality’s creditworthiness. Double-barreled bonds are hybrid and may finance a variety of projects.
Bond anticipation notes: Anticipation notes are similar to bridge loans issued by corporations, in anticipation of larger funding or when there are several projects to be combined under a single funding. These notes, with a term of less than one year, are generally repaid following the issuance of longer-dated municipal bonds (generally much larger in size). Anticipation notes are often used as a means to kick-start funding efforts for new projects. Once the project has begun, the larger bond issue should generate enough funds to redeem all the bond anticipation notes.
Insured bonds: Insured bonds are bonds with insured payments of interest and principal by a third party, usually an insurance company that specializes in insuring municipal bonds. This is a credit enhancement feature added to regular munis, be it GO or revenue bonds, as an incentive to investors.
Zero-coupon municipal bonds: A zero-coupon municipal bond is a bond that makes one payment at redemption (call/maturity), which is based on the principal invested and the interest earned, compounded semi-annually at a predetermined yield. Most zero-coupon municipal bonds mature between ten and 40 years. There are two primary types of zero-coupon municipal bonds.
Convertible zero-coupon munis: These bonds are sold as zero-coupon munis and are generally converted into interest paying bonds after eight to 15 years.
Stripped munis: Stripped munis pay interest on a semi-annual basis. They can be customized by separating (or stripping) and adjusting the interest and the principal. A cash flow of the coupons is repackaged into stripped municipals with a greater variety of maturities, ranging from six months to 40 years. Stripped munis are issued at a deep discount, similar to zero-coupon munis, and can be bought at a fairly low price.
Taxable municipal bonds: Taxable municipal bonds are bonds that are taxable; as they are issued for purposes the federal government considers will not provide significant benefits to the public at large. Most munis are tax-exempt, but incomes from taxable bonds are taxable for the investor. Taxable bonds offer risk-adjusted yields, similar to those available from other taxable entitles such as corporate bonds, rather than tax-exempt bonds. Certain munis are not exempt from federal taxes. The taxable municipal bond market represents over $300 billion of the almost $4 trillion muni market.
Original issue discount bonds: Original issue discount bonds (OIDs) are issued at a discount from the par value of the bond. This discounting of the bond gets special treatment under the federal tax law; if the bonds are held until maturity, the difference of issuance price and par is treated as tax-exempted income instead of capital gain.
Escrowed-to-maturity bonds: For these bonds, money is placed in an escrow account and is used to pay the principal and interest through the bond’s originally scheduled maturity date. The issuer may reserve the right to call the bond if conditions warrant such a call.
Conduit bonds: A government agency or entity issues municipal bonds to fund a revenue-generating project and the funds are used by a third party (known as the conduit borrower). A conduit borrower indirectly makes interest and principal payments to investors. Generally, the conduit borrower’s credit or funds pledged toward the project by outside investors back the conduit financing. If a project fails and the security goes into default, it becomes the conduit borrower’s financial obligation, not the conduit issuer’s.
Build America Bonds: Build America Bonds, or BABs, are taxable municipal bonds introduced under the American Recovery and Reinvestment Act, 2009. These bonds were issued by local and state authorities and provide tax credit or federal subsidies equal to 35% of the interest on the bonds because they were issued to fund Infrastructure projects. This was initiated to stimulate economic growth by funding development projects.