The interest paid on most
corporate bonds is considered investment income, and it's taxed. To
encourage investors to lend money to cities, towns, and states to
pay for public projects — like schools, highways, and water systems
— Congress exempts municipal bond interest from federal income
taxes, although interest from some of these bonds may be subject to
the alternative minimum tax (AMT).
If you are considering a corporate bond and a
municipal bond with the same rating that both paid 4% interest,
the obvious choice would be the tax-exempt municipal bond. But the
choice is seldom that simple. High-rated municipal bonds usually pay
at a lower rate than corporate bonds, precisely because they have
a tax advantage. Thus, municipal bonds, commonly called munis,
usually appeal most to investors in the highest tax brackets, where
the tax exemption can provide the biggest tax savings.
In most states, municipal bond interest is also exempt from state
tax (and city tax where it applies) for investors who live in the
state where the bond is issued. An Ohioan, for example, would pay
no Ohio income tax on interest earned on a Cincinnati bond. But someone
from Kentucky who bought the Cincinnati bond might have to pay Kentucky
tax on the income. Neither investor, however, would pay federal tax
on the interest. |
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READING MUNI STATISTICS
There are hundreds of thousands of munis
in the market. This illustration provides price information for some
of the largest bonds that are being actively traded.
1.
The name of the issuing municipal government or government
agency is listed, along with a series number, if it applies.
2.
Coupon is the interest rate the bond pays, given as a percentage
of par value. The bond issued by Denver School District #1 pays 5%
of par value in interest, or $50 per $1,000.
3.
Mat is short for maturity, the date
the bond matures and will be paid off. The first Alameda, California,
bond in the chart comes due on October 1, 2025.
Munis are often long-term bonds, with maturities of 20 to 40 years.
All of the bonds in this list mature between 2019 and 2038.
4.
Price is the amount the bond sold for in the secondary market
at the end of the previous trading day, given as a percentage of par.
5.
Chg, short for change, is
the difference between the price quoted here and the previous day's
closing price. It is quoted in fractions of a point, just as corporate
bonds are, with each 1/8 equal to $1.25. The price of Alaska International
Airports was up 1/4 of a point, or $2.50. So if the price here
is $975, the previous one was $973.50.
6.
Bid yld, for bid yield, is the rate of return. It's
calculated based on the interest rate, the amount you would pay for
the bond, its redemption value, and the time remaining until it matures.
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BOND OFFERINGS
When states, cities, or towns want to offer new
bonds, there are two ways to get them to market. They can negotiate
an arrangement with a securities firm to underwrite the bond, or they
can ask for competitive bids.
A competitive bid means the issuer works with the lowest bidder to
sell the bonds. A negotiated agreement takes other
factors into account.
Most offerings — up to 80% — are negotiated. The main
advantage is a guaranteed presale. The potential problems are the
opportunity for manipulating the deal to the advantage of the underwriter
at the expense of the taxpayer, who foots the interest bills, and
the possibility of political kickbacks. Competitive bids are free
of those problems, but may rule out developing a strong working relationship
that could benefit the issuer and the public. |
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