Municipal Securities and Municipal Finance
The instruments
General obligation bonds pledge the issuer's full faith and credit and, where applicable, its taxing power; revenue bonds are payable solely from a defined revenue stream and flow of funds. Know the hybrids: special assessment, tax increment, lease/appropriation (COPs), conduit 501(c)(3) and multifamily housing bonds where the municipal entity is only a conduit and the credit is the borrower's, and double-barrel structures.
The economics
Tax-exempt interest is why muni yields sit below comparable taxable yields; arbitrage and yield-restriction rules police the spread. Understand par versus price, original issue discount, premium bonds, coupon versus yield, serial versus term maturities, call features, and the difference between a current and an advance refunding. Debt affordability analysis uses direct and overlapping debt, per capita and percentage-of-valuation measures, and the capital improvement plan.
The document set
Official statement, bond counsel opinion, continuing disclosure undertaking under SEC Rule 15c2-12 (annual financial information plus material event notices, generally within ten business days of the event), trustee and paying agent agreements, and preliminary versus final official statement.
Traps
- Treating a conduit borrower's revenue pledge as a general obligation of the issuer.
- Confusing yield with coupon.
- Overlooking that a failure to file required continuing disclosure is itself a material event.
- Assuming a rating is a legal requirement or a substitute for credit analysis.
Rule of thumb
Follow the money twice: where does debt service come from, and what legally secures it? If those two answers differ, you are looking at a conduit or appropriation credit.