Muni Bond Tax Flashcards
Federal income tax is
Interest is free from federal income tax, based on reciprocal immunity which applies to US Supreme Court
Interest is paid
Semi annually
State income tax
Most states exempt muni interest on bonds issued within the state. Taxes usually apply on out-of-state bonds
One exception is commonwealth of Puerto Rico
Interest on Puerto Rico bonds is
Exempt from all fed state an local taxes
Corporate equivalent yield
Interest on corp bonds is fully taxable, without evaluating taxation differences corp are more appealing due to higher yields or coupon
Corporate equivalent yield formula:
Municipal yield/(100%-investors tax rate) = taxable corp equivalent yield
Current yield on muni bond formula
Current yield = annual interest/mkt px
Muni bond premiums
Not like corp bond premiums/ bonds purchased above par. For tax purposes, premiums must be amortized over the life of the bond, results in a reduced cost basis
When muni bonds is purchased at a premium Held to maturity
Sold prior to Maurity
No tax consequences, premium fully Amoritized
Reduce cost basis by the amount that has been amortized(written off)
Premiums on corp bonds may either be
Amortized over the life of the bond or taken as a loss in full maturity
Muni discount
OID, if you buy bond at a discount at the original offering, discount treated as interest income not cap gain, works in the investors favor interest income is tax free
Secondary market discount
If you buy a bond at a discount in the 2nd market, discount is treated as ordinary income -fully taxable
Municipal bonds trading at a discount are always more:
Volatile because they are more sensitive to interest rate changes than bonds trading at premium
SWAPS
Exchange for one bond for another bond, investor looking to offset capital gains in their equity portfolios to avoid tax consequences, also sell and reinvest. Take capital loss by selling these bonds at a loss
SWAPS allow an investor to:
Upgrade a portfolio by switching into a higher rated bond
Extend or shorten time to maturity
Increase income or yield interest
Realize cap loss for tax purposes
Accrued interest is_____that you trade any type of bond, or ______never do a SWAP
Never never, accrued interest is always the result of trading a bond, it shouldn’t be the reason that you trade a bond
Who is large buyers of muni bonds?
Individuals, commercial banks, insurance companies. Because of the tax exempt status of the bond interest.
Who does not benefit from tax exempt status of muni bonds since they are taxed free
Charitable institutions, IRAs and pension funds
Blue List
Was a daily listing of municipal bonds for sale by dealers who had positions or inventories in various municipal issues, 2nd market
Contents of blue list
Amount of bond available Name of bond and issuing authority Coupon rate Maturity date Yield or price Name of the dealer offering the bond Purpose of the bond
- Blue list does not contain:
- Blue list total is:
- Inventory listings:
- Bonds quality rating
- Market indicator total par value
- Bondtrac and bond express
The bond buyer:
Newspaper of new issues
Placement ratio
Been there done that, new %tage of new issues that have been sold each week
30 day visible supply
Total # of new issues coming to mkt in next 30 days, good indicator of the expected supply in the new issue mkt
Issues of municipal______are _____included in the 30-day visible supply
Notes, not
Bond buyer index
Index of 20 GO bonds with 20yr maturities , new issues bonds as a percentage of total new issue volume for the week
Bond buyers revenue bond index
Avg yield of 25 specific revenue bonds each with 30 year maturities
Moody’s
Reference Manuel about outstanding bond issues, coupon rates, maturities, call provisions, and ratings