In: Finance
Cover municipal bonds, how are the used by the issuers, how are they used by the investor, what are the risks and benefits of them? Also please look for a couple of examples of current municipal bonds being offered and explain their yield, risks and current situations?
Municipal bonds, also popularly known as munis, are debt obligations issued by government entities. Issuers of municipal bonds are government entities and issuers rely on municipal bonds for two main reasons. First of all the issuer may issue general obligation bonds and the purpose of this bond is to raise capital to cover and meet expenses. Secondly the issuer may issue revenue bonds and the purpose of revenue bonds is to fund large scale projects like infrastructure projects.
Investors who want to adopt a conservative investment strategy generally invest in municipal bonds. While the municipal bonds are not risk free, the element of risk is relatively low as these bonds are backed by government entities. Investors who want to preserve their capital and also generate a tax free income stream will invest in municipal bonds. The benefit for investors is that the interest income received by them is tax free. The risk for the investors is that the issuer may fail to make scheduled interest payments and principal payment which becomes due on maturity.
As an example in the year 2001 the City of Chicago had issued a bond for funding its Midway Airport project. The total issue size was $222,465,000 and the bond paid an interest of 5.5%. The bonds will mature in the year 2031.