Municipal Securities: GO, Revenue & Tax Math
Key facts on municipal bond types, taxation, and tax-equivalent yield calculations for the SIE.
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Questions Covered in This Set
10 cards to master
What is the federal tax treatment of municipal bond interest and of capital gains on munis?
Interest is generally exempt from federal income tax; capital gains on munis are ALWAYS taxable.
What backs a general obligation (GO) bond?
The full faith, credit, and taxing power of the issuer — state GOs from income/sales taxes, local GOs from ad valorem (property) taxes. Usually requires voter approval and is subject to debt limits.
What backs a revenue bond, and what ratio is used to analyze it?
Only the revenues of a specific project or enterprise (toll road, airport, hospital). Analyzed with the debt service coverage ratio = net revenues ÷ annual debt service. No voter approval or debt limits.
Net revenue pledge vs. gross revenue pledge?
Net (most common): operations & maintenance paid first, then debt service. Gross: debt service paid first.
State the tax-equivalent yield (TEY) formula.
TEY = municipal yield ÷ (1 − investor's marginal tax rate).
A muni yields 3.5% and the investor is in the 32% bracket. What is the TEY?
0.035 ÷ 0.68 = 5.15% — the investor needs a taxable bond yielding more than 5.15% to do better.
How do you find the after-tax yield on a corporate bond?
Corporate yield × (1 − tax rate). Example: 6% × 0.68 = 4.08%.
Why are munis inappropriate for IRAs and 401(k)s?
The accounts are already tax-advantaged, so the federal tax exemption is wasted while accepting a lower yield.
What is an industrial development revenue bond (IDR/IDB)?
Issued by a municipality but backed by lease payments from a corporation; credit quality is the corporation's, and as a private activity bond the interest may be subject to AMT.
What is a double-barreled bond and a moral obligation bond?
Double-barreled: backed by both a revenue pledge and the issuer's taxing power. Moral obligation: relies on a legislature's non-binding intent to appropriate funds.
