Investing in Municipal Bonds

Municipal bonds are debt obligations in which the purchaser lends funds to the borrower or issuer. The issuer may be a state, county, city or other government entity. Funds from the issuance of municipal bonds may be used to fund public projects such as the construction of schools, hospitals, highways and other projects for the public good. In return for the loan, the issuer promises to pay a specified amount of interest – typically semi-annually – and then return the principal on a specific maturity date.

Taxation of Municipal Bonds. Not all municipal bonds are structured the same – some are taxable at both the federal and state level. There is a category of municipal bonds that are taxable at the federal level, but still offer a state and sometimes local, tax exemption on interest paid to residents of the state of issuance.

Tax-exempt Municipal Bonds. Municipal securities may be either long-term or short-term in nature. Short-term securities typically mature in a year or less, with long-term securities maturing in more than a year. There are two basic types of municipal securities:

 General Obligation Bonds. Principal and interest are secured by the “full faith and credit” of the issuer and are usually supported by the issuer’s taxing power. General obligation bonds must be approved by voters.

Revenue Bonds. Principal and interest are secured by revenues derived from tolls, charges, rents or other revenues generated by the facility built with the proceeds of the bond issues. These types of projects include toll roads, bridges, airports, hospitals, schools and senior living facilities. Frequently, these bonds are issued by special authorities created for the specific purpose of the project.

View our Taxable Equivalent Yields chart to see how the tax-exempt advantage can keep more of your investment income working for you. 

Taxable Municipal Bonds

The federal government cannot subsidize certain public projects because they are not perceived as providing a significant benefit to the public at large. Projects such as local sports facilities or investor-led housing are federally taxable issues.

Non-Rated Municipal Bonds

There are several agencies, with Moody's® and Standard and Poors® as two of the most recognizable, that research bond issues and issue a credit rating for the issue.

Some municipalities issue non-rated bonds. There are typically two reasons why a municipal bond wouldn't be rated by a credit agency:

• In some cases, despite a high credit quality of the issuer, a bond issue may be small in size making the costs associated with obtaining a rating from a credit agency uneconomical. Or;
• The issue doesn't meet the criteria of a rating agency. These bonds may present a higher degree of risk, and will typically have a higher yield making them attractive to investors with an appropriate risk profile and objective.

Non-rated municipal bonds are typically revenue bonds as opposed to general obligation bonds. These revenue bonds are used to fund specific projects, and the interest payments are generated from the cash flow, or revenues of the project. Types of projects most commonly funded with non-rated municipal bonds are hospitals, senior living communities, multifamily housing and private schools and colleges.

It is important to understand the project and revenues supporting repayment of interest payments. To help you understand the issue, the offering document will outline the intended use of the proceeds, a description of the project, security for the bonds and risks associated with the project. For newly issued securities, your financial advisor can provide the offering document and help you to understand the opportunities and risks associated with these investments.

Bond Anticipation Notes (BANs)

Bond Anticipation Notes are smaller, short-term bonds which will be paid off with the proceeds from a subsequent bond issue. BANs are typically issued by municipalities to fund an upcoming project, with subsequent plans for issuing bonds that will cover the expenses over the long term.

The Ziegler Advantage

Ziegler is one of the nation's leading investment banks providing financing for healthcare facilities and senior living communities. We have also earned nationwide recognition for bringing specialized financing to religious organizations, schools and renewable energy providers.

These are dynamic businesses that offer diverse services to our communities. The needs of these organizations and the financial structures required to support them are complex, creating opportunities for our clients to participate in the financing required for these organizations. We are able to offer our clients fixed income investment products in these sectors that are often only available through Ziegler.

Fixed income securities are subject to market risk and interest rate risk. If sold in the secondary market prior to maturity, investors may experience a gain or loss depending on interest rates, market conditions and the credit quality of the issuer.

Municipal bonds are sensitive to interest rate movements, and will fluctuate with market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds adjust to a rise in interest rates, their price may decline. In general, securities with longer maturities are more sensitive to interest rate changes. Also consider such factors as credit quality, maturity ranges, call features, your tolerance for risk and your investment goals when considering individual securities.

B.C. Ziegler and Company does not provide tax or legal advice. Please consult your tax advisor regarding the suitability of these investments in your portfolio.