- What are municipal
bonds?
Municipal bonds are securities issued by state and local governments, their agencies, and/or political subdivisions to finance governmental, non-profit and other public benefit projects. The bond issuer borrows needed money by selling municipal bonds. The investors who buy municipal bonds become creditors and are essentially loaning money to the issuer to fund public benefit projects. Each bond is, in effect, an IOU representing the issuer's promise to repay the borrowed amount in a stated period of time. In exchange for the use of the money, the issuer usually also makes interest payments to the bondholders until the bonds are repaid.
- What is meant
by tax exemption?
Interest earnings from certain municipal bonds are exempt from federal income taxes under section 103(a)(1) of the Internal Revenue Code. In addition, they can be exempt from the income taxes of the state and locality in which the issuing municipality, political subdivision or agency is located. Interest paid on tax-exempt bonds issued by the City of New York can be triple tax-exempt for residents of the City, which means the interest is exempt from federal, state, and city income taxes. However, issuers including New York City also sell taxable bonds. Investors need to carefully examine the tax status of municipal bonds before making a purchase decision.
- Are municipal
bonds for me?
Municipal bonds are not necessarily a suitable investment
for everyone. The extent of their suitability depends
on one's income, tax bracket, investment objectives
and other factors. Therefore, prior to buying municipal
bonds, one should consult with a qualified tax or
investment advisor.
- Are there taxable municipal bonds?
Some issuers, including the City of New York, regularly issue taxable as well as tax-exempt municipal bonds. In addition, in 2009 and 2010, as authorized under the American Recovery and Reinvestment Act, the City and its authorities sold taxable Build America Bonds (BABs). Also authorized under the Act are Qualified School Construction Bonds (QSCBs), which the City continues to sell. Interest on BABs and QSCBs is not exempt from federal income taxes. Investors should check with their financial advisors or brokers regarding tax status before making a purchase decision.
- Who buys municipal
bonds?
Individual investors, bank trust departments, mutual fund companies, insurance companies, and other corporations all buy municipal bonds. Buyers can also include investment firms that purchase municipal bonds as part of a market trading strategy, and especially for taxable bonds, pension funds and overseas investors. The composition of the buying base and level of demand can shift over time.
- Can I purchase
bonds directly from the City?
No. Municipal bonds sold by the City can be purchased from registered broker-dealers nationwide. See Purchase NYC Bonds for more details.
- My bond matured
at least 6 months ago and I was unable to redeem it.
Do I earn interest on principal for the period during
which I did not redeem my bond?
No. Interest earned on unredeemed principal and/or interest becomes property of the City. The investor will only receive the stated principal and/or interest amount stated on the bond. It is incumbent upon the investor to present the bond for payment/redemption in a timely manner to the City's Fiscal Agent. See Redeem NYC Bonds.
- How do I redeem
bonds that matured more than 3 years ago?
The proceeds on bonds which have matured more than
three years ago, have been escheated to the New York
State Comptroller's Office of Unclaimed Funds. The
bondholder should contact that office to begin the
claim process at the following:
New York State Comptroller
Office of Unclaimed Funds
110 State Street
Albany, New York 12236-0001
(800) 221-9311
- How are municipal
securities rated?
The three major rating agencies
that evaluate municipal credit are Standard and Poor's, Moody's Investors Service and Fitch Ratings Ratings. They research the issuer's
ability to repay debt and then assign a rating which ranks the quality of the bonds. The definitions of ratings can be found on the respective rating agency website.
Standard & Poor's - Ratings Definition
Moody's Investors Service - Ratings Definition
Fitch Ratings - Ratings Definition
- What are the 6-digit root CUSIP numbers for GO, TFA and NYW bonds?
The 6 digit root CUSIP number for New York City General Obligation bonds are 649654, 649655, 649656, 649657, 649658, 649659, 64965D, 64965R, 64965V, 64965W, 649660, 649664, 649665, 649666, 649667, 649668, 649669, 64966A, 64966B, 64966C, 64966D, 64966E, 64966F, 64966G, 64966H, 64966J. The 6 digit root CUSIP number for NYC Transitional Finance Authority bonds are 64971Q, 64971M, 64972H, 649716 and 64971K. The 6 digit root CUSIP number for NYC Municipal Water Finance Authority bonds is 64972F, 64971G, 64970K and 649706.
- Can I sell my municipal bond prior to its maturity date?
With the assistance of a broker, most municipal bonds can be sold prior to the stated maturity date. The price at which the bonds can be resold at depends on many factors, such as prevailing market interest rates, overall market supply and demand, quantity of bonds being sold, and perceived credit quality of the bonds.
- What are interest rate exchange agreements or swaps?
An interest rate exchange agreement or swap is a contract entered into by an issuer with a swap provider to exchange periodic interest-like payments. Most frequently, one party agrees to make payments to the other based upon a fixed rate of interest in exchange for receiving payments based upon a variable rate. Interest rate swap contracts can be used as hedges against interest rate risk or to achieve a lower expected cost of funding in connection with a bond issue. For example, an issuer may issue variable rate debt and simultaneously enter into an interest rate swap contract, where the issuer will pay to the swap counter-party a fixed rate payment in exchange for the counter-party making variable payments to the issuer. The variable rate swap receipt and variable rate interest payment are expected to generally offset each other, leaving the issuer in this example with a net fixed rate cost of funds. There are other types of interest rate swaps as well.
In an effort to reduce borrowing cost over the life of its bonds, New York City began entering into interest rate exchange agreements commencing in Fiscal Year 2003. See NYC Debt Profile and Swap Detail for further details on New York City's swaps.
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