Self-government bodies carry out an economic policy aimed at improving the standard of living of citizens. The deficit of finance intended for the implementation of state programs is covered by attracting loans. One of the ways to fill local budgets is to sell municipal bonds.
The concept
These are securities issued by local authorities. They are debt obligations, which indicate the loan repayment period, guaranteeing their holders the receipt of a certain fee - discount or coupon income. The issuers in this case are the states, provinces, governing bodies of the city, state-owned toll roads.
Investors have the opportunity to purchase such securities during their placement on the stock market, as well as buy them on the secondary market from holders.
An additional attractiveness of municipal bonds is that coupon income on them is exempted from local and state taxation.
You can buy bonds of this type on the Russian stock market, and by their status they are equivalent to government bonds. Fulfillment of obligations on such securities is ensured by collecting local taxes, income from investment projects, houses, bridges, roads.
Municipal bonds differ from government bonds by the level of collateral and the issuing entity. The provision of such securities is not guaranteed by the government of the countries, unless such a condition is separately specified. That is why they are considered a more risky investment, where the repayment of the debt is guaranteed by the reputation of the municipality or collateral.
Features
Municipal bonds are a profitable investment destination for those wishing to purchase securities. They prescribe specific terms for the repayment of the debt, the rate of return is indicated in advance. The decision on the issue is made by local authorities.
Kinds
Securities, depending on whether there is a pledge or not, are divided into unsecured and secured.
Let us consider in more detail the types of municipal bonds.
Specialists classify them as follows:
- With premium and sold at face value.
- Interest-free, interest-bearing.
- Zero-coupon, coupon.
- Special, targeted.
Loans are classified according to the following criteria:
- Market, non-market.
- External, internal.
- By validity.
Also, municipal bonds can have different purposes:
- The development of regional infrastructure.
- Stabilization of the project (protection of estimates from a shortage of funds).
- Elimination of the budget deficit.
Examples
Subfederal (municipal) bonds are most common in the United States. About half of the government securities are municipal type. The peak of this market was in 2010, when the value of all issued securities amounted to about 3.8 trillion dollars, which, in turn, exceeded half of the country's GDP.
Municipal bonds in the United States first appeared in the 19th century. By attracting funds, the Erie Canal and the New Orleans Port were erected in New York. After the end of the civil war, construction of railways across the continent began. These works were paid for at the expense of funds that were collected through the issuance of bonds.
The development of the municipal loan bond market in Russia began in 1992, and by the beginning of the 2000s, about 100 issues of securities had been produced. After that, the indicators stabilized in the region of this figure.
Some Russian entities have so far actively used bonds to attract development loans. Among the leading regions in the market of municipal organizations is St. Petersburg, Tomsk Region, Moscow.
For example, for 2018, bonds issued by the Tomsk Region are estimated at about 10 billion rubles.
Reliability
Municipal bonds are highly reliable. Since 2003, only one issue of such securities has defaulted. The government makes sure that payments are stable, trying to help troubled borrowers. More reliable than municipal government bonds only. Due to the high stability of municipal bonds, the yield on them is lower than corporate bonds, but higher than on bank deposits. In addition, banks often lose their licenses, and all funds in excess of 1.4 million rubles may be lost. There is no similar risk with municipal bonds.
Liquidity
Equally important is the liquidity of securities of this type. They are always traded on the exchange, and the holder can sell them at any time, or, conversely, purchase them.
Sale entails the receipt of accumulated coupon income. For example, if a payment of 100 rubles is made once every six months, then a sale after 3 months will allow you to receive 500 rubles of income accumulated over 3 months. Selling a bond can be problematic if at that moment it is not in demand. In this case, the sale will have to be carried out at a discount, or remain the holder of the security until maturity.
In addition, there is a likelihood of changes in interest rates in the economy, respectively, and the value of all debt securities will change. If rates rise, then municipal bonds become less attractive. This is due to the fact that you can put money on a bank deposit, where the percentage of income will be higher. This state of affairs leads to a decrease in the value of bonds. This is important to consider if the bondholder does not plan to hold them until redemption.
Municipal bonds of the Russian Federation are sold and bought on the stock exchange, to which individuals do not have access. This will require a broker - an intermediary engaged in trade.
Disadvantages and advantages
Thus, it is possible to highlight the disadvantages and advantages of such papers. Among the advantages, there is a high level of reliability, as well as the yield of municipal bonds, the absence of a tax on coupon profit, liquidity, and a low level of risk of loss of funds. Among the shortcomings are the need to pay the tax on the difference (if the sale is carried out at a price higher than the purchase price), the impossibility of independent purchase and sale on the exchange (this will require the services of a broker), as well as the need to reduce the price if you want to sell bonds and there is no demand for them.
Having assessed all the advantages and disadvantages of municipal bonds, we can conclude that these securities are a good investment tool, especially if the contribution is made for a short period.