Frequently Asked Questions
Find answers below to some of the basic questions about how EMMA works, what are
the key features of municipal securities, how you should read an official statement,
what is an advance refunding, and how to understand the price and other terms of
a bond trade.
- What are bonds?
Municipal bonds, or "munis," are issued by states, counties, cities, or their agencies
to finance public projects such as new schools, road and bridge development and
improvement, and construction of public utilities, affordable housing, airports,
and hospitals, and a myriad of other public facilities and programs. A municipal
bond effectively represents a loan made by investors to the municipal issuer, and
the periodic interest payments and principal repayment at maturity paid to investors
represent the issuer's repayment of that loan.
- What is the difference between a bond
and a note?
Although there is no formal difference between a municipal bond and a municipal
note, a note generally matures, or remains "outstanding," for a shorter period of
time than a bond, typically less than two years and some times for as short as a
few months. Bonds, on the other hand, may remain outstanding for as long as 20,
30, 40 or even more years.
- What is a conduit bond?
In some cases, a governmental entity issues municipal bonds for the purpose of making
proceeds available to a private entity in furtherance of a public purpose, such
as in connection with not-for-profit hospitals, affordable housing, and many other
cases. These types of municipal bonds are sometimes referred to as "conduit bonds."
One common structure is for the governmental issuer to enter into an arrangement
with the private conduit borrower in which the bond proceeds are loaned to the conduit
borrower and the conduit borrower repays the loan to the issuer. For most conduit
bonds, although the governmental issuer of the bonds is legally obligated for repayment,
that obligation usually is limited to the amounts of the loan repayments from the
conduit borrower. If the conduit borrower fails to make loan repayments, the governmental
issuer typically is not required to make up such shortfalls. Thus, unless the bond
documents explicitly state otherwise, investors in conduit bonds should not view
the governmental issuer as a guarantor on conduit bonds.
- Are all munis tax-exempt, and are all
tax-exempt bonds munis?
Although most municipal bonds are exempt from gross income for federal income tax
purposes and in many cases also exempt from taxation by the issuer's home state,
some municipal bonds are issued on a taxable basis. In other cases, a municipal
bond, often referred to as an “AMT bond,” may qualify for the tax exemption under
the normal calculation of federal income tax but may be subject to the federal alternative
minimum tax. At initial issuance, a legal opinion from a law firm ("bond counsel")
typically is delivered describing the tax consequences of investing in the bonds.
A copy of this legal opinion is often included in the official statement for the
Although most tax-exempt bonds are municipal bonds, in some cases other types of
debt securities qualify for tax exemption, such as bonds issued by federally recognized
Indian tribal governments or for certain other tax-favored non-municipal purposes.
EMMA is designed to provide information solely about municipal securities.
- What is the difference between a fixed
rate and variable rate bond?
The traditional form of bond pays a fixed rate of interest until maturity. This
will be stated as the bond's interest rate or "coupon" rate. Fixed rate bonds typically
pay interest semi-annually on specific interest payment dates. For example, if you
own $10,000 of a bond with a coupon rate of 5%, you typically would be paid $500
of interest annually, payable in semi-annual installments of $250.
Variable rate demand obligations or notes, often referred to as VRDOs or VRDNs,
pay interest based on a variable rate, that is, a rate of interest that is adjusted
from time to time. Typically, interest rates will be reset on a specific schedule
of periodic adjustments. The periodic resets in these cases can occur daily, weekly,
monthly, semi-annually, annually, or even less frequently. The interest rate reset
may be based on the best estimate of a broker-dealer or bank, acting as remarketing
agent, as the rate in the then-current marketplace necessary to allow the bonds
to be resold to investors at their full face value, or at “par.” Less commonly,
the interest rate may be determined based on a formula pegged to an index or other
market interest rate measurement. An investor typically is given the right to require
that the issuer or its agent repurchase the bonds from the investor at the full
face value of the bond, known as a "put" or "optional tender." The issuer in most
cases arranges for a bank or other financial institution to make funds available
to the issuer, or to provide "liquidity," to repurchase bonds that have been put
and that the remarketing agent is unable to immediately resell to other investors.
- What is the difference between a variable
rate bond and an auction rate security?
In many respects, an auction rate security is simply a special type of variable
rate bond, with certain key differences. Unlike in the case of most other variable
rate bonds, auction rate securities generally do not have a "put" feature or a liquidity
provider to ensure that an investor can sell his or her holdings at their full face
value. Also, the periodic reset of interest rates occurs through a unique "auction"
process in which existing investors in the securities indicate whether they wish
to sell their holdings outright, retain their holdings outright or retain their
holdings only if the next interest reset is at or better than a rate specified by
the investor. Other potential investors interested in purchasing the securities
also place orders indicating the interest rate they wish to receive on the securities.
In many auction rate programs, the broker-dealer or bank appointed as the "program
dealer" for the securities may also enter orders for the securities, but the program
dealer generally is not required to do so. A financial institution serving as "auction
agent" will then seek to determine what is the lowest interest rate that can be
set for the securities so that the cumulated amount of purchase orders placed at
or below such lowest interest rate will match the total amount of securities that
are available for sale during such auction. Such lowest interest rate will then
be the interest rate for the next rate period. If no existing investors in the securities
wish to sell their holdings, the securities will typically pay interest for the
next rate period at a pre-determined "all-hold rate." If insufficient purchase orders
are placed to clear the market of all sale orders in an auction, then no sales will
occur as a result of the failed auction and the existing investors in the securities
will retain their holdings for the next rate period at a pre-determined "fail" rate.
- What is the difference between an issuer
and an underwriter?
An issuer creates the bond and is ultimately obligated for repayment on the bonds.
In the municipal securities market, an issuer is a state, county, city or agency,
authority, district or other public-purpose entity of such unit of government. An
underwriter is the broker-dealer or bank (individually or in a group) that agrees
to purchase the bonds from the issuer and to resell the bonds to the investing public.
Municipal securities are not issued by a broker-dealer or bank, and any investment
instrument issued by a broker-dealer or bank is not a municipal security.
- What is bond insurance?
A municipal issuer may obtain insurance from a bond insurance company, sometimes
referred to as a “monoline” insurance company, in connection with the issuance of
its bonds for the purpose of providing protection for investors against possible
payment defaults by the issuer. In other cases, bonds may have initially been issued
without bond insurance but a broker-dealer or bank may afterwards obtain so-called
secondary market bond insurance on all or part of the issue. In the event of a payment
default by the issuer, the bond insurance policy would in most cases provide for
the insurer to pay the principal and interest on the bonds as originally scheduled,
rather than accelerating payment in a single lump-sum.
- What is a credit rating?
Many municipal bonds receive a credit rating from one or more "nationally recognized
statistical rating organizations," known as rating agencies. These ratings typically
represent the rating agencies' estimation of the likelihood that the issuer will
make payments on the bonds in a full and timely manner. Ratings often are assigned
based on the issuer's financial health and other factors that each rating agency
determines are relevant. In addition, issuers may obtain bond insurance or other
forms of "credit enhancement" that will typically result in a higher rating on the
bonds due to the rating agency's estimation of the financial strength of the provider
of the bond insurer or other credit provider. Both the rating based on insurance
or credit enhancement and the issuer's own "underlying" rating are subject to change
at any time upon determination by the rating agency that such change is warranted.
A rating represents an opinion of the rating agency that has issued the rating and
is not a guarantee that bonds will be paid in a full and timely manner. There is
no assurance that a rating will be maintained over the life of a bond.
The descriptions included in the FAQs above are generalizations and do not necessarily
accurately represent the terms of any specific security. You must read the disclosure
materials and other relevant documents to fully understand your security.