Question

Compare and contrast investment in municipal bonds and Treasury securities. Specifically, describe how they may differ in risk and return profiles. Imagine Federal tax rates were increased on high income earners. How might this change the relative demand for these two types of securities?

Answer 1

Municipal Bonds

State governments issue municipal bonds to raise money like say for a new hospital or road. the most common types of municipal bonds are general obligation bonds and revenue bonds. A general obligation bond is backed by the credit of the city and state in which the bond is issued on the assumption that the local government

a) can raise money from taxes

b) won’t default. A revenue bond is backed by the revenue that will be generated by the project the bond funds..

Ex : Tolls on a new road

Treasury securities

Treasury securities are debt obligations issued by the US department of the treasury. treasury securities are considered one of the safest investments because they are backed by the full faith and credit of the US government. The income from treasury securities may be exempt from state and local taxes, but not from federal taxes.

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