The Basics of Municipal Bonds

If your primary investing objective is to preserve your capital while generating a tax-free income stream, municipal bonds are worth considering. Municipal bonds, or munis, are debt obligations issued by government entities. When you buy a municipal bond, you are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period. At the end of that period, the bond reaches its maturity date, and the full amount of your original investment is returned to you.

While municipal bonds are available in both taxable and tax-exempt formats, the tax-exempt bonds tend to get the most attention because the income they generate is for most investors exempt from federal and, in many cases, state and local income taxes. Investors subject to the alternative minimum tax must include interest income from certain munis when calculating the tax, and should consult a tax professional prior to investing

Two Varieties
Municipal bonds come in two varieties: general obligation bonds and revenue bonds. General obligation bonds, issued to raise immediate capital to cover expenses, are supported by the taxing power of the issuer. Revenue bonds, which are issued to fund infrastructure projects, are supported by the income generated by those projects. Both types of bonds are tax exempt and particularly attractive to risk-averse investors due to the high likelihood that the issuers will repay their debts.

Risk Factors
While buying municipals bonds is most often viewed as a conservative investment strategy, it is not risk-free. Hare are the risk factors:

Credit Risk If the issuer is unable to meets its financial obligations, it may fail to make scheduled interest payments and/or be unable to repay the principal upon maturity. To assist in the evaluation of an issuer's creditworthiness, ratings agencies such as Moody's Investors Service and Standard & Poor's analyze a bond issuer's ability to meet its debt obligations, and issue ratings from 'Aaa' or 'AAA' for the most creditworthy issuers to 'Ca', 'C', 'D', 'DDD', 'DD' or 'D' for those in default. Bonds rated 'BBB', 'Baa' or better are generally considered appropriate investments when capital preservation is the primary objective. To reduce investor concern, many municipal bonds are backed by insurance policies guaranteeing repayment in the event of default.

Interest-Rate Risk The interest rate of most municipal bonds is paid at a fixed rate. The rate does not change over the life of the bond. If interest rates in the marketplace rise, the bond you own will be paying a lower yield relative to the yield offered by newly issued bonds.

Tax-Bracket Changes Because municipal bonds generate tax-free income, they generally pay lower interest rates than taxable bonds. Investors who anticipate a significant drop in their marginal income-tax rate may be better served by the higher yield available from taxable bonds.
Call Risk Many bonds allow the issuer to repay all or a portion of the bond prior to the maturity date. The investor's capital is returned with a premium added in exchange for the early debt retirement. While you get your entire initial investment plus some back if the bond is called, your income stream ends earlier than you were expecting it to.

Market Risk The underlying price of a particular bond changes in response to market conditions. When interest rates fall, newly issued bonds will pay a lower yield than existing issues, which makes the older bonds more attractive. Investors who want the higher yield may be willing to pay a premium to get it. Likewise, if interest rates rise, newly issued bonds will pay a higher yield than existing issues. Investors who buy the older issues are likely to do so only if they get it at a discount. If you buy a bond and hold it until maturity, market risk is not a factor because your principal investment will be returned in full at maturity. Should you choose to sell prior to the maturity date, your gain or loss will be dictated by market conditions, and the appropriate tax consequences for capital gains or losses will apply.



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Characteristics of municipal bonds

Taxability

One of the primary reasons municipal bonds are considered separately from other types of bonds is their special ability to provide tax-exempt income. Interest paid by the issuer to bond holders is often exempt from all federal taxes, as well as state or local taxes depending on the state in which the issuer is located, subject to certain restrictions. Bonds issued for certain purposes are subject to the alternative minimum tax.

The type of project or projects that are funded by a bond affects the taxability of income received on the bonds held by bond holders. Interest earnings on bonds that fund projects that are constructed for the public good are generally exempt from federal income tax, while interest earnings on bonds issued to fund projects partly or wholly benefiting only private parties, sometimes referred to as private activity bonds, may be subject to federal income tax.

The laws governing the taxability of municipal bond income are complex; however, bonds are typically certified by a law firm as either tax-exempt (federal and/or state income tax) or taxable before they are offered to the market. Purchasers of municipal bonds should be aware that not all municipal bonds are tax-exempt.



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Purpose of municipal bonds

Municipal bond issuers

Municipal bonds are issued by states, cities, and counties, or their agencies (the municipal issuer) to raise funds. The methods and practices of issuing debt are governed by an extensive system of laws and regulations, which vary by state. Bonds bear interest at either a fixed or variable rate of interest, which can be subject to a cap known as the maximum legal limit. If a bond measure is proposed in a local county election, a Tax Rate Statement may be provided to voters, detailing best estimates of the tax rate required to levy and fund the bond.

The issuer of a municipal bond receives a cash payment at the time of issuance in exchange for a promise to repay the investors who provide the cash payment (the bond holder) over time. Repayment periods can be as short as a few months (although this is rare) to 20, 30, or 40 years, or even longer.

The issuer typically uses proceeds from a bond sale to pay for capital projects or for other purposes it cannot or does not desire to pay for immediately with funds on hand. Tax regulations governing municipal bonds generally require all money raised by a bond sale to be spent on one-time capital projects within three to five years of issuance.[1] Certain exceptions permit the issuance of bonds to fund other items, including ongoing operations and maintenance expenses, the purchase of single-family and multi-family mortgages, and the funding of student loans, among many other things.
Because of the special tax-exempt status of most municipal bonds, investors usually accept lower interest payments than on other types of borrowing (assuming comparable risk). This makes the issuance of bonds an attractive source of financing to many municipal entities, as the borrowing rate available in the open market is frequently lower than what is available through other borrowing channels.
Municipal bonds are one of several ways states, cities and counties can issue debt. Other mechanisms include certificates of participation and lease-buyback agreements. While these methods of borrowing differ in legal structure, they are similar to the municipal bonds described in this article..


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Municipal bond

In the United States, a municipal bond (or muni) is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds include cities, counties, redevelopment agencies, school districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) below the state level. Municipal bonds may be general obligations of the issuer or secured by specified revenues.

Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.


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OPEC Delays 35 Oil Projects to Boost Prices

The declining oil prices, owing to the financial crisis which erodes world demand for crude oil, has forced the Organisation of Petroleum Expor-ting Countries (OPEC) to delay 35 oil projects till after 2013.
OPEC's Secretary-General, Mr. Abdalla El-Badri, disclosed at a Chatham House energy conference, weekend that the group's revenue had been adversely affected by oil's record plunge, a development which he said prompted member countries to set back 35 of the 150 projects due to come on stream in the next few years to expand supply.
El-Badri had in a report published in OPEC website stated that the falling prices of crude oil will not only affect investments in both the upstream and downstream sector, but would delay future investments. He raised fears that if the present situation does not change, it will lead to cancellation of future investments and automatically affect oil supply to the market.

"If the present situation does not change and we do not return to reasonable prices for oil products, the likely effects will be far-reaching. Very low prices will affect investments in both the upstream and downstream. This will have two main consequences. First, it will delay future investments in the sector, and second, it may also lead to the cancellation of further future investments. "Either way, this will automatically affect oil supply to the market. In addition, it will also have an effect on gas supply," he said.

OPEC which pumps a third of the world's oil earned close to $1-trillion last year, according to the U. S. Energy Information Administration.
But El-Badri confirmed that the group's income this year would be cut by 50 per cent. "The decline ‘cost’ OPEC US$356-billion in income in the period from the peak in prices to last month,” he said, adding that the startup dates of many other projects are still expected to slip.

The OPEC scribe said declining oil demand worldwide had prompted OPEC to reduce output by 4.2 million barrels per day (bpd) since September to prop up prices, boosting its unused production capacity to about eight million bpd.
Despite the gloom, OPEC has attempted to stay ahead of the slowdown in demand, by removing 4.2 million bpd of production from the market, about five per cent of daily world demand.
El-Badri said early indications are that members have delivered on 80 per cent of that pact, higher than some estimates. Another 900,000 bpd had to go to ensure perfect compliance, he added.
Oil has fallen to $40 a barrel from a record high of $147 in July 2008 as a deepening recession erodes demand for fuel. To help revive prices, OPEC said it is willing to cut yet more oil output at a meeting in March.

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