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The Fundamentals of Municipal Bonds, 6th Edition


Praise for The Fundamentals of Municipal Bonds

"How far municipal bonds have come since I joined the bond business in 1963 and the first edition of The Fundamentals of Municipal Bonds was placed in my hands! Long-term issuance hit all of $10 billion a year, genaral obligation bonds constituted 95 percent of the municipal bond market, and 'they're safe, they're tax-free, and they don't fluctuate much' could almost have said it all. Fast forward a half century to the Sixth Edition which sheds lights on the $2.9 trillion in municipal bonds now outstanding. Writer Neil O'Hara has performed a feat of clarity and omniscience for SIFMA, explaining and fitting all the pieces, players, and moving parts of this ever expanding municipal bond market into a coherent whole. Read and underline, ye beginners at bonds, salty old pros, elected officials, attorneys at law, financial writers, quants, wonks, and believers in public investment in the physical underpinnings of our quality of life. Munis are the one tool you've got for lifting this magnificent country off its magnificent bottom. And here is literally everything you need to know to do it."
Jim Lebenthal, Lebenthal & Co. LLC

"The Fundamentals of Municipal Bonds is an excellent survey of key topics in municipal finance that can be read from cover-to-cover by lawyers, bankers, professional investors, issuers, and others starting out in the municipal bond market. In addition to describing the roles of key participants in the issuance and trading of municipal securities, Neil O'Hara gives a useful overview of the most prevalent types of financings in cogent language. Major tax and securities law issues are brought up-to-date, and veterans of public finance will find the discussion of current topics, such as derivative products, a useful reference guide that makes difficult issues easily accessible."
Robert Fippinger, Senior Counsel, Orrick, Herrington & Sutcliffe LLP

The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms, banks, and asset managers. SIFMA's mission is to support a strong financial industry, investor opportunity, capital formation, job creation, and economic growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, DC, is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit
Preface ix

Writer’s Acknowledgments xi

CHAPTER 1 Overview of the Municipal Bond Market 1

Introduction 1

The Issuers 4

Municipal Bond Dealers 7

The Lawyers 10

Financial Advisors, Specialists, and Other Consultants 11

The Rating Agencies 12

Bond Brokers 13

The Credit Enhancers 13

The Trustees and Paying Agents 17

The Investors 17

Information and Technology 18

The Regulators 19

Other Participants 21

CHAPTER 2 The Basics of Municipal Securities 23

Description of Municipal Securities 23

Yield and Price 26

Types of Yields 28

Tax Exemption of Municipal Bonds 29

Types of Municipal Bonds 35

Short-Term Securities 36

Other Characteristics of Municipal Bonds 45

CHAPTER 3 The Issuers 55

Introduction 55

Authorities and Special Districts 56

The Theory of Municipal Debt: Pay-As-You-Use versus Pay-As-You-Go 57

The Uses of Municipal Debt 59

The Security for Municipal Bonds 61

The Financing Process 68

The Financing Documents 71

Structuring the Debt 81

State and Local Government Accounting 87

CHAPTER 4 The Primary Market 93

Issuance Trends in the Primary Market 93

The Basics of Underwriting 96

Negotiated Underwriting 101

Competitive Underwriting 105

Orders and Procedures 111

CHAPTER 5 The Secondary Market 117

Introduction 117

The Over-the-Counter Market 117

E-Commerce, Information, and Technology 119

Selling Municipal Bonds 121

The Basics of Municipal Bond Trading 123

Municipal Bond Trading 124

How a Trade Is Done 128

Municipal Futures 130

Providers of Data in the Municipal Market 131

Market Statistics and Indexes 132

MSRB Record-Keeping Rules 136

CHAPTER 6 Investing in Bonds 139

Introduction 139

The Basic Principles of Investing in Bonds 139

Measures of Yield and Return 143

Yield to Maturity and Price 145

Investment Objectives 147

Risk Factors 148

Investor Strategies 150

Taxation of Municipal Bonds 152

Other Investment Factors 161

Investor Categories 163

CHAPTER 7 Credit Analysis 173

Introduction 173

The Rating Agencies 175

The Rating Process 176

General Obligation Bonds 179

Revenue Bonds 197

Other Factors Affecting Credit 207

CHAPTER 8 Understanding Interest Rates 211

Introduction 211

Determinants of the Overall Level of Interest Rates 212

Term Structure of Interest Rates 216

Municipal Bond Rates 221

CHAPTER 9 Regulatory and Disclosure Requirements 225

Introduction 225

The Basis of Federal Tax Exemption 226

History of Federal Tax Legislation Affecting Municipal Securities 228

The Current Statutory Exemption 230

Application of Federal Securities Laws to Municipal Securities 233

The Municipal Securities Rulemaking Board 239

CHAPTER 10 Financial Products 247

Introduction 247

Interest Rate Swaps 247

Interest Rate Caps, Floors, and Collars 252

Other Swap Products 253

Managing the Asset Side 253

Credit Default Swaps 254

APPENDIX Municipal Securities Rulemaking Board Rule G-33 257

Glossary 265

Bibliography 283

Web Sites 283

Books and Publications 284

About the Writer 285

Index 287