Federal Home Loan Mortgage Corp. - GMC Guaranteed Mortgage Certificates • pool of conventional mortgages • interest semi-annual--fully taxable • principal returned once a year in a guaranteed minimum amount 7/9/1114:00 A7/P7 9
Other Agencies Student Loan Marketing Association-Sallie Mae purchases insured student loans sells debentures using loans as collateral semi-annual interest--fully taxable quoted as percentage of par in 32nd privatized- listed on NYSE implicitly guaranteed by govt Resolution Trust Company (1989) issued bonds guaranteed by govt no longer issuing bonds Federal Housing Administration Tennessee Valley Authority 7/9/1114:00 A7/P7 10
MUNICIPALS Characteristics 0. Debt issues of state, local governments and political subdivisions 1. Interest usually tax exempt from Federal income tax 2. May be subject to state and local tax (resident of the state of issue exemption) 3. New issues are in registered form 4. Issues until mid 1983 are in bearer form 0. no record of owner 1. bearer coupons 2. congress prohibited bearer bonds in 1983--tax evasion 3. more desirable than registered--trade at higher price 5. Some are in book-entry (resistance) 6. Legal opinion by bond counsel on the face of bond 7. opinion on whether the issue is legally binding and the tax exemption of the interest 8. unqualified opinion 9. qualified opinion 10. Serial bonds 11. Most long-term debt 12. maturities spread out over the life of the issue 13. interest semi-annually 14. if issue designed such that interest and principal repayment are the same each year than called “level debt service” 15. Discount 16. short-term bonds • Types • General Obligations (GO) • Payment of interest and principal from the full taxing power of the issuer • local government--ad valorem taxes • property taxes • State constitutional limit on debt limits • Default--tax levy or legislative appropriation to make payment • Revenue Bonds (Self-Supporting Debt) • Interest and principal paid from a specified source of revenue • operations of projects,user fees, rents, grants, excise and other non- valorem taxes • Feasibility study • usually outside consultants • Most issued under a trust indenture • protective covenants • maintenance--good repair • rate -- maintain fees at level to pay debt • segregation of funds--revenues collected from project separate from general pool of funds • maintenance of books and records---usually annual audit 7/9/1114:00 A7/P7 11
• TAX Equivalent Yield • TEY=(Tax-exempt muni yld)/(1-federal marginal tax rate) • May be exempt from state and local taxes • Effective state tax rate= (State marginal tax rate)*(1-federal marginal tax rate) • Combined Effective tax rate+ effective state rate + federal rate • Combined TEY = (Tax-exempt muni yld)/(1-combined effective tax rate) CORPORATE BONDS Characteristics • Trust indenture • coupon rate • maturity—20-40 years • special features • Usually callable • Sinking fund • protective covenants • Trustee • Trust Indenture Act 1939 • Requires all corporate debt over $5,000,000 to have an indenture • Secured Debt • Specific collateral is pledged against the issue •
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