A municipal bond

A municipal bond - mortgage crisis of 2009 sharp drops in...

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A municipal bond is a type of bond issued by a government agency or a city. They are securities that are issued to fund the various projects and infrastructures such as highways, schools, libraries, hospitals, etc. When considering the risk of a municipal bond you consider how likely the issuer is to remunerate the bondholder, on time and in full. There are general obligation bonds, revenue bonds, and assessment bonds. The probability of remuneration is determined by a rating agency such as Standard and Poor’s, Moody’s and Fitch. These agencies assign bond ratings; this information potentially helps sell bonds on the primary market. But what are the real risks of holding municipal bonds when states and municipalities are struggling to pay their bills? Municipal bonds have typically had very low default rates as they are backed either by revenue from public utilities or state and local government power to tax. But due to the
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Unformatted text preview: mortgage crisis of 2009 sharp drops in property valuations have led to state and local finance constraints, potentially leading to municipal defaults. An example of the low risk of municipal bonds is California that states in its state constitution that bondholders come only second to primary education to be paid from tax receipts. One of the main problems surpassing the fear of defaults is the fact of “what happens if an investor wants to sell the bonds before the maturity date?” Given the current financial climate of most states it’s difficult to sell bonds close to even their original price. The market for munis is on the up and up, experts believe that the market is taking a signal from California and pricing the bonds as if there are more likely to default than they are....
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