Income Products
Guidance
Fixed Income Funds
Fidelity Open Bond Market
FDIC Insured Products
Streamline Trading
Services
|
| |
| Product Overview |
|
 Municipal bonds are debt obligations issued by states, cities, counties and other public entities who use the loans to fund public projects such as the construction of schools, hospitals, highways, sewers and universities. |
|
| Top |
|
| Features and Benefits |
|
| • |
|
Interest income generated by municipal bonds is generally exempt from federal income taxes and, if the bonds are held by an investor resident in the state of issuance, state and local income taxes. As a result, their stated interest rate may be less than that of fully taxable bonds, however, they may provide greater returns after taxes are taken into account. Such interest income may be subject to federal and/or state alternative minimum taxes. Capital gains and gains characterized as market discount recognized when bonds are sold or mature are generally taxable at both the state and federal level, although capital losses can usually be used to offset capital gains. Investors should consult a tax professional regarding their individual tax situation. See Risks section for other tax considerations. |
|
| • |
|
Most municipal bonds are rated by one of the major rating agencies. |
|
| • |
|
There is a strong over-the-counter secondary market for many municipal bonds sold prior to maturity. The size of that market and features of each bond influence the ability, to be bought and sold on the secondary market. |
|
| • |
|
Many municipal bonds are backed by insurance which guarantees (subject to the claims paying ability of the insurer) timely payment of both interest and principal in the event that the issuer defaults. However, in many instances, insured bonds typically have lower yields than non-insured bonds. |
|
| Top |
|
| Risks |
|
|
| As mentioned below, the most significant categorization of municipal bonds lies between general obligation bonds and revenue bonds. General Obligation bonds (GOs) may be generally considered safer than Revenue bonds for the simple reason that the interest and principal of GOs are backed by the full faith and credit of the issuer. With revenue bonds, the interest and principal are dependent upon the revenues paid by users of the facility or service. Frequently the issuers of revenue bonds are either private sector corporations (eg: hospitals) or entities that exist, often in local monopoly form, to provide a public service (eg: power utilities or public transportation authorities). Thus the thought is that the consumer spending that provides the funding or income stream for revenue bond issuers may be more vulnerable to changes in consumer tastes or a general economic downturn compared to a State or city's ability to raise taxes to pay for its GO commitments. |
|
| At the same time, investors should be careful in relying on the above generalization without thinking about the specifics of each case. |
|
| 1) Investors should take into account the overall economic health of the region or customer base and the impact it might have on the revenues the entity depends upon in order for it to sustain its bond payment commitments. Consider a utility (revenue) bond from a city with high per capita levels of income and employment compared to a GO from a city that is suffering from declining industries and high levels of unemployment or a declining population. |
|
| 2) Secondly, understand the exact source of the revenues that will service and repay the debt. Is the bond solely dependent upon one source of revenue or is a larger entity standing behind the issue? |
|
| 3) Third, consider the entity's track record of operational effectiveness. How has the entity managed its spending in the past? Has the city or corporation a track-record of solid growth from attracting more customers or taxpayers from more diverse sources? Generally speaking, the presence of these factors will strengthen the entity in the face of difficult economic circumstances. |
|
| 4) Finally, try to assess the competence of financial management of the entity. Has its credit rating been maintained or strengthened over a period of time, how has it weathered previous economic downturns? How much debt does this city or institution have? What is its debt service ratio - i.e. how much of its cash-flow is committed to paying down debt vs. being invested in new projects or supporting services of value for the community? |
|
| Investors are encouraged to weigh all of these factors before they invest in municipal bonds. Although this may seem challenging, Fidelity provides you with the information to enable you to do this. In summary investors are advised to take the following steps as they invest in municipal bonds: |
|
| |
| |
• |
|
Check the credit ratings of the bonds. |
|
| |
• |
|
Just as importantly, monitor the change in credit ratings during your ownership of the bond. Fidelity provides a free email alert service to help you keep current on the ratings upgrades or downgrades of an issuer. |
|
| |
• |
|
Read the issue's Official Statement. This information may be found at the msrb's EMMA website, which you can link to from Fidelity.com, free of charge. Once at the site, type or paste in the cusip of the bond (or the issuer's name) you are considering to retrieve the complete Official Statement of the issue. This document will provide the information covered above on the health and nature of the revenue stream (taxpayers/customers), the operational capabilities or efficiency or the entity, and finally the competency of financial management at the organization over time. |
|
|
| • |
|
Like all fixed income securities, municipal bonds are susceptible to fluctuations in interest rates. If interest rates rise, market prices of existing bonds will decline, despite the lack of change in both the coupon rate and maturity. Long-term bonds are generally more susceptible to this than shorter-term bonds. |
|
| • |
|
Many municipal bonds carry call provisions that allow the issuer to retire the bond prior to stated maturity. Except as stated below, these calls are clearly defined in both the securities detail and as an attribute on Fidelity.com's offering table and usually pay the holder a premium if the issuer exercises this right. An issuer will typically call bonds when prevailing interest rates drop, making reinvestment less desirable for the holder. Some municipal bonds, including housing bonds and certificates of participation (COPS), may be callable at any time regardless of the stated call features. |
|
| • |
|
Credit risk is the risk that the issuer will default or be unable to mak required principal or interest payments. Despite the fact that most municipal bonds have high credit ratings, there is a risk of default in any bond investment. Higher rated securities are generally seen as having a lower credit risk associated with the municipal bond investment. An insured bonds may add an extra layer of protection. In summary
When considering an investment in an insured municipal bond, you should also consider the strength of the underlying insurer. An insured bond's credit rating may not be the same as that of the issuer. |
|
|
| Generally, tax-free municipal securities are inappropriate holdings for tax-advantaged accounts such as IRAs and other retirement accounts. Please consult your tax advisor for advice about your specific situation. |
|
|
| Tax-exempt interest generated by municipal bonds is usually more beneficial the higher your tax bracket so municipal bonds may not be appropriate for investors in all tax brackets. If you are subject to the federal alternative minimum tax (AMT), the interest income generated by certain municipal bonds (mainly private activity bonds) is subject to it. You may set your search criteria to exclude municipal bonds subject to the AMT. |
|
| • |
|
The risk that the rate of the yield to call or maturity of the investment may not provide a positive return over the rate of inflation
for the period of the investment. |
|
| • |
|
Not all risks can be anticipated by the bond's issuer or well articulated in the prospectus or offering circular. Often called "special event risk", lawsuits or significant legal changes, another community's public works project, unusual weather, or other events could impact the issuer's ability to meet their financial commitments. An economic downturn maycan also cause investors to reconsider risks that previously seemed unlikelyaffect the risk of fFixed income investments. |
|
| • |
|
Any fixed income security sold prior to maturity may be subject to a
substantial and taxable gain or loss.-Please change the link name "Risks of Fixed Income Investin" to "Risks of Fixed Income Investing |
|
| See Risks of Fixed Income Investing to learn more about bonds, bond ratings and some of the risk associated with investing in fixed income securities. |
|
| Top |
|
| Types of Municipal Bonds |
|
| While all municipal bonds can be separated into general obligation and revenue bonds, there are several types of bonds in both categories. |
|
| • |
|
Principal and interest payments for general obligation bonds are secured by the full faith, credit and general taxing powers of the issuer. GOs represent a promise by the issuing municipality to levy enough taxes as necessary in order to make timely and complete payments to investors. |
|
| • |
|
Principal and interest payments for revenue bonds are secured by revenues from the project being financed. Because revenue bonds are not backed by the issuer's taxing authority they are generally considered more risky than general obligation bonds, and therefore tend to offer higher interest rates. |
|
| • |
|
Some municipal bonds are insured by policies written by commercial insurance companies. The insurance provides timely payment to bondholders if the issuer defaults. |
| • |
|
Because of this additional protection, insured bonds will usually have a lower interest rate than non-insured ones. Investors should consider the credit-worthiness of the insurer as well as that of the issuer when considering insured bonds. A bond's issuer may no longer be able to rely upon an insurer to back scheduled payments if the insurer experiences financial difficulties of its own. |
|
| • |
|
A municipal bond issued at a price less than par, which qualifies for special treatment under federal tax law is an original issue discount bond. The difference between the issue price and par is treated as tax-exempt income rather than a capital gain if the bonds are held to maturity. |
|
| • |
|
Some municipal bonds are taxable because the federal government will not subsidize the financing of activities that do not provide a significant benefit to the public. Local sports facilities (e.g. stadiums), borrowing to replenish a municipality's underfunded pension plan, or investor-led housing are a few examples of bond issues that would not qualify for federal tax exemption. Build America Bonds are a new program that allows municipalities to issue taxable municipal bonds. The advantage for the issuer is that they receive a 35% federal rebate on interest costs for these bonds. |
|
| • |
|
Zero coupon municipal bonds can be an attractive alternative for high tax bracket investors who are not in need of current income. These bonds are issued at a discount. The full value, including accrued interest, is paid at maturity. |
| • |
|
Interest income from zero coupon municipal bonds may be reportable annually even though no annual payments are made. |
| • |
|
Market prices of zero coupon bonds tend to be more volatile than bonds which pay interest regularly. |
|
| • |
|
Some municipal securities originally issued as straight general obligation or revenue bonds may become refunded. When a security is refunded, it is escrowed or collateralized by either U.S. government treasury securities or some other types of securities. The securities in the refunding escrow fund are set up so they mature when interest, principal and premium payments are due. Refunded bonds are considered one of the safest municipal securities available. |
|
| • |
|
Pre-refunded bonds are refunded bonds that are scheduled to be called on the first possible call date or a subsequent date as outlined in the bond's indenture. This structure is typically used to reduce the interest payment expenses for the issuer. |
|
| • |
|
Some refunded bonds are not scheduled to be called. These securities, known as escrowed-to-maturity (ETM) bonds, are backed by escrow funds designed to make payments as outlined in the security's original indenture. |
|
| • |
|
Housing bonds are securities backed by mortgages and mortgage loan repayments. These bonds can be called at any time, although this will not be reflected in the call feature. |
|
| • |
|
Municipal notes are short-term debt obligations that usually mature within a year or less, but may mature within two or three years, depending on the source of the redemption. Municipalities issue notes to generate stable cash flow while they wait for other expected revenues. Municipal notes usually trade in large blocks, with a minimum investment of $100,000. The types of municipal notes depend on the source of future cash flow. |
| There are a number of resources and Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) available to investors to help them learn about and evaluate municipal bonds, including: |
|
| • |
|
EMMA - The Electronic Municipal Market Access system from the Municipal Securities Rulemaking Board (MSRB) |
|
| • |
|
MuniFILINGS® by DPC Data |
|
| • |
|
Standard & Poor's Disclosure Directory |
|
| • |
|
Investinginbonds by the Securities Industry and Financial Markets Association (SIFMA) |
|
| • |
|
Financial Industry Regulatory Authority (FINRA) information for investors |
|
|
|
|
