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Municipal bond issuers are those organisations in charge of distributing bonds in exchange usually for a cash payment. Municipal bonds are issued normally by countries, states and cities within those municipality. You also see agents who act on behalf of those whom the bond directly belongs to. The law governing the issue of municipal bonds is highly extensive and full of numerous barriers to entry for those who are not compatible with them. It should be mentioned that these laws and the legislation that they represent vary country by country, state by state. The interest rate that municipal bonds receive is either a fixed or variable sum, depending again on the terms laid out by the issuer.

When a municipal bond is initiated, the issuer normally receives a cash payment in exchange for an agreement to provide the investor who provided the cash payment, a repayment over an agreed time period. The standard repayment periods for municipal bonds can be anything from six months to 10-30 years, perhaps even longer. The shorter periods are quite rare and you would be hard pressed to find investments for such a short period of time unless either the sum being borrowed is low or the repayment period can be guaranteed. Typically, 20+ years is the industry standard.

The purpose of municipal bond investing would be to use the investment from a bond sale to pay for the project that it is being invested for, typically this is a project or a long term capital investment or development. Depending on the stipulations of the bond offering, all of the capital raised from a bond sale may be used immediately or provisions put in place to spread it over a period of time.

Popularity: 11% [?]

A municipal bond, or “muni” as it is sometimes referred to is a debt security issued by a municipality, country or state to fund its capital expenditures. It’s important to firstly say that municipal bonds are usually exempt from federal taxes and most state and other local taxes. The only consideration however is that you should really reside in the state that the bond is issued as this increases the chances of keeping your municipal bonds tax-exempt.

Investors who agree to buying municipal bonds effectively loan money to the issuer in exchange for an agreed number of payments over a prearranged time period. At the end of this period, the bond reaches what is called the bond maturity date and the investor receives (if all goes well) the return on their investment including the interest allotted over the time period.

There are quite a number of uses for municipal bonds. For example they may be used to finance such developments as the construction of road networks such as highways or academic schooling facilities.
Perhaps the most common reason people invest in “munis” is because of their extremely favourable tax implications. They are most popular with high income earners as the return on their investment is larger due to the rewarding municipal bond rates they are entitled to.

Popularity: 5% [?]

What is bond convexity?

Bond convexity is a direct measure of the duration sensitivity of a bond when its interest rate is changing. There is one key thing to remember here, as bond yields go higher, the price of them goes lower. In essence, the relationship this statement has, between price and yield, it has a convex structure in nature. You won’t be surprised to hear that this relationship is otherwise known as convexity. For any type of bond, a graph of the direct relationship between its price and yield is convex. As we have already mentioned, this means the graph forms a curve rather than a straight-line which would be called linear. Just how curved a graph is shows how much a bond’s yield changes in response to changes in price.

What is the bond convexity calculation?

As we have already discussed, convexity is a direct measure of the curvature or 2nd derivative of how the price of a bond varies with a specific interest rate. In more simplistic terms, this means how the duration of a bond changes as the interest rate also changes. We will assume in this example that the interest rate of the bond does not change or at least for the life of the bond, it remains static. A duration can therefore be formulated as the first derivative of the price of the bond. Using convexity methods, the 2nd derivative can be used with the interest rate.

What are the factors that affect bond convexity?

• Callable bonds negate convexity at particular price-yield combinations (ie; As market yields decrease so to does duration).
• The higher the coupon rate the lower the convexity of a bond (Zero-coupon bonds are the bonds with the highest convexity).
• Price yield relationship shows us that price-yield curve will increase as yield decreases. (ie; As market yields decrease the duration increases).

What is the bond convexity formula?

We attempted to produce a guide explaining the bond convexity formula but we just couldn’t do it justice and would recommend you see the contribution at Wikipedia which you can find here.

Popularity: 58% [?]

What is a private activity bond?

A private activity bond is a bond issued by the government to finance a private facility or project. In this case, “the government” can mean local, state, or, rarely, the federal government. According to The IRS, private activity bonds can be used for projects that fall under section 141(b)(1), 141(b)(2), and 141(c). These sections are fairly specific, so if you’re considering a private activity bond, take the time to review who is eligible and what stipulations apply to you.

How are private activity bond interest rates calculated?

Private activity bond interest you will be glad to know, does not count towards your gross income on your taxes unless the private activity bond is a qualified bond. If it is, the bond is subject to regular taxes. If it isn’t qualified then it isn’t counted towards your annual gross income.

What are the private activity bond tax regulations?

Private activity bonds are usually issued with the intent of providing funds to a project that, while private in nature, do have some public use or benefit. Because private activity bonds are exempt from federal taxes (although the interest is not), they can help the private user reduce his or her financing costs for the project. Again, the rules and regulations surrounding private activity bonds are very strict and specific, making them one of the rarer types of private bonds.

Popularity: 18% [?]

A private investment bond is quite similar to a private activity bond, only here, the bond loans money to a private entity. Much like private activity bonds, private investment bonds can be used to finance any number of private projects. Private investment bonds, though, do not carry all of the stipulations that private activity bonds do, making them much easier to acquire. However, the private entity does have to pay interest on the private investment bond.

Investors provide private equity capital in return for achieving risk adjusted returns that will be greater than those that could be achieved in public equity markets. Investors typically don’t invest in privately held companies; they develop a diversified portfolio of private equity funds instead.

Private equity firms usually receive the return on their investment through an initial public offering or a merger acquisition. Occasionally you will also see recapitalization where cash is distributed amongst the shareholders.

Popularity: 8% [?]

Private bonds are, unlike public purpose bonds, used to finance projects instead of public operations and investments. These can be used to back just about any private facility or project that requires the funding. Private bonds are quite often referred to as private purpose bonds, essentially these are the exact same thing, they are just two different terms used in differing situations. Private bonds have many uses, as an example, the construction of a new railway network could be financed through a private purpose bond.

There are two major differences between private bonds and public bonds; first, the facility will be privately owned, and second, private bonds are taxed unless otherwise stated. According to The Tax Reform Act of 1986 where municipal bonds were separated into two types; public purpose bonds and private purpose bonds – Public purpose bonds are exempt from federal taxation. Private purpose bonds however as already stated are taxed.

Private bonds can be used to construct facilities that will be used by the public, and this is one of the main uses of private bonds. Private bonds interest is payable on all investments taken out, the amount of payable interest however depends on the terms of the agreement.

Popularity: 52% [?]