Abstract
This chapter discusses the credit ratings, insurance, and taxation issues of the U.S. municipal bond market. Municipal bonds in the United States are securities that are issued by the state and local governments as well as institutions created by them. The exemption from federal taxation makes municipal bonds attractive to individual retail investors; approximately 75% of all outstanding paper is held by individuals. The municipal bond in the United States is essentially a plain vanilla bond market. A fall in the level of the tax rate will reduce the value of a municipal bond. Certain issuers of municipal bonds set up an insurance cover for their bonds in the event of default. The key tax consideration for investors in municipal bonds is the rate of federal income tax. There are a range of municipal bonds with special characteristics that are termed “hybrid bonds.” The chapter also discusses some short-dated instruments in the municipal market that are termed “notes.”
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