Question

Q. 2. The newly elected municipal chairman has taken over his new office. After reviewing the files and
visits in his area, he is of the view that they require major infrastructural changes in his municipality i.e.
repairing the sewerage lines, constructions of roads and green belt etc. This would require a huge
investment and hence the issuance of municipal bonds. You have been hired as his financial advisor and
hence are required to do the following;
a) To brief him about the types of municipal bonds?
b) Which municipal bond is best suited for this project and why?
c) What is the process of trading these bonds?
d) Which option should he prefer and why?

Answer 1

a) There are two types of Municipal Bonds based on their source of repayments

- General Obligation Bonds - They are generally not backed by any specific project or revenue source, they are payable from general funds

- Revenue Bonds - They are backed by specific project for which the fund is raised, and they are repaid from specific revenue stream, example the revenue stream can be generated by either a project such as road construction, a toll, etc.

b) For the project of - repairing the sewerage lines, constructions of roads and green belt etc Revenue bonds are best suited as the future revenues from such constructions can be used to repay the bonds

c) Unlike shares/corporate bonds, which are tradable on public exchanges, municipal bonds do not trade on any exchange platform. Rather, they trade in a manner known as over the counter (OTC), which means transactions are conducted directly between two private entities.

d) he should perfer revenue bonds for longer tenor as the specific project revenue can be used to repay the bonds later