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Municipal Bonds

Citation

Deng, X and Goebert, C and Morgulis, G and Yates, I, Municipal Bonds, Debt Markets and Products, Oxford University Press, Oxford, United Kingdom, pp. 200. (In Press) [Research Book Chapter]

Abstract

Municipal bonds are an important section in the bond market. Government entities including states, local governments, U.S. territories, and special authorities and districts issue municipal bonds to help finance capital projects. The size of this market has grown from $361 billion of outstanding municipal debt in 1981 (U.S. Securities and Exchange Commission 2016) to $3.83 trillion in the fourth quarter of 2016 (Reuters 2017).

A municipality rarely seeks bankruptcy protection, which reduces the risk of default and increases the chances of recovery in the event of default. Non-government municipal bond borrowers are not bankruptcy remote and their ability to declare bankruptcy creates additional risk for investors. However, municipal bankruptcies and defaults are quite rare, particularly for rated bonds. In fact, rated municipal bonds are less likely to default than comparably rated corporate bonds. For example, the average cumulative 10-year default rate for AA bonds is 0.02 percent for municipal bonds versus 0.78 percent for global corporate bonds. For BBB bonds, default rates are 0.40 percent and 3.93 percent for municipal bonds and corporate bonds, respectively (Moody’s 2017).

Economic cycles affect municipal bonds. For example, bonds backed by fees from an entertainment venue are vulnerable to external economic circumstances, such as the health of the economy and consumer behavior. An additional attractive aspect of municipal bonds is that interest on municipal bonds is exempt from federal income tax and potentially exempt from state income tax as well. Similar to other fixed-income securities, municipal bond market prices have an inverse relation with interest rates.

Item Details

Item Type:Research Book Chapter
Keywords:municipal bonds, bankruptcy protections, finance, economics
Research Division:Economics
Research Group:Applied Economics
Research Field:Financial Economics
Objective Division:Commercial Services and Tourism
Objective Group:Financial Services
Objective Field:Finance Services
UTAS Author:Deng, X (Dr Xiaohu Deng)
ID Code:132419
Year Published:In Press
Deposited By:Economics and Finance
Deposited On:2019-05-07
Last Modified:2019-06-13
Downloads:0

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