Handbook of Finance: Financial Markets and Instruments

Chapter 22. Municipal Securities

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

Abstract: Debt obligations are issued by state and local governments and by entities that they establish. These securities are referred to as municipal securities or municipal bonds. The two general types of municipal bond structures are tax-backed securities and revenue bonds. There are also municipal bonds with special bond structures. The primary attractiveness of municipal bonds is that the interest earned is exempt from federal income taxation. While not all municipal securities are exempt from federal income taxation, tax-exempt municipal bonds are the largest component of the market.

Keywords: municipal bonds, tax-backed debt obligations, revenue bonds, general obligation debt, Municipal Securities Rulemaking Board (MSRB), taxable municipal bonds, original-issue discount (OID) bond, alternative minimum taxable income (AMTI), alternative minimum tax (AMT), official statement, municipal notes, variable rate demand obligations (VRDOs), utility revenue bonds, transportation revenue bonds, housing revenue bonds, higher education revenue bonds, health care revenue bonds, seaport revenue bonds, insured bonds, letter of credit (LOC), bank-backed municipal bonds, refunded bonds, equivalent taxable yield, tender option bonds (TOBs), inverse floater, residual, effective marginal tax rate, structure risk, tax risk

In this chapter, we discuss the types of debt obligations ...