Municipal bonds are primarily characterized by credit ratings, maturity and tax exemption. Municipal bonds also may be eligible for bond insurance. This improves liquidity, the ability to buy and sell a bond near its current market price as well as marketability, or broad desirability by investors. Each list of municipal bonds ranks these criteria from best to worst. Checking each list should lead the investor to an appropriate security purchase. Creating your own list of investment criteria helps narrow possible investment alternatives.
Lists of Municipal Bond Criteria
Credit rating is the most important criteria in choosing bonds. There are several bond ratings services, notably Moody's, S&P and Fitch. Each agency rates bonds according to a sliding scale that measures outstanding debt, ability to pay and the long-term trend. With some variation, the highest rating is AAA. Lower investment grade is Baa, and default is CC. The strongest municipal credits are state credits such as Texas, Utah and South Carolina. Weaker credits include California, Nevada, New York and New Jersey.
List of Revenue Bond
Revenue bond issues are secured by a specific revenue stream, such as a local tax, sales tax, property tax or other revenue tax. Revenue bonds to build large projects involve statewide mandates, such as pollution control and large transit projects. A notable list of such issuers include the Florida Highway Authority, the New York State Bridge and Tunnel Authority, the New York and New Jersey Port Authority and the Maryland Department of Transportation.
General Obligation Bonds
States that offer the full faith and credit of the state when issuing municipal bonds is called a general obligation offering. Most states and counties issue general obligation bonds to provide a more consistent cash flow. General obligation bonds also may be offered by counties and large cities. New York City is the largest city offering general obligation bonds. State bonds are generally stronger than county bonds. County bonds are stronger than city and special purpose municipal bonds. San Francisco, Los Angeles, Atlanta, Nassau, Suffolk County, New York City and Boston are all large issuers.
Municipal bonds are issued according to the expected life of the project they are funding. In the case of buildings and long-term water and sewer projects, this may mean bond terms of up to 40 years. Nearly every state has outstanding issues of 30 years or more and long-maturity bonds have the highest municipal bond yields available. Investors may find municipal bond insurance available on these bonds sufficient to give the investor a high investment grade rating. Louisiana, Missouri, Florida, Rhode Island and Connecticut regularly employ bond insurance.
After an 18-year career on Wall Street as a trader of municipal and mortgage backed securities, Carmelo Montalbano developed a very large desktop trading application that managed more than 30 institutional portfolios. Technology and small business acquisitions continue to be his primary interest.