The Handbook of Municipal Bonds
Fabozzi-style reference covering credit, structure and analytics.
Summary
The reference has not verified this book in detail; the summary states only what the title, author and subject establish.
Feldstein and Fabozzi edited a comprehensive reference on the American municipal bond market, with chapters contributed by practitioners covering the instruments, the credit analysis, the market structure and the legal framework. The reference has not verified the individual chapters.
The subject divides into distinct areas. The instruments include general obligation bonds backed by the issuer's taxing power, revenue bonds backed by a specific project's receipts, and the many specialised structures covering water and sewer, transportation, higher education, healthcare, housing and industrial development. Credit analysis differs by type: a general obligation credit turns on the tax base, the local economy, the debt burden per capita and the pension obligations, while a revenue credit turns on the project's economics, the rate covenant and the debt service coverage.
The tax treatment is the market's organising feature. Interest on most municipal bonds is exempt from federal income tax and often from state tax for in-state holders, which means the buyer base is dominated by individuals and by tax-sensitive institutions, and yields trade at a ratio to Treasury yields determined by the marginal tax rate of the buyer at the margin.
Other material covers bond insurance and its role before the crisis, the disclosure regime which differs substantially from corporate securities, the primary market and competitive versus negotiated sales, secondary market liquidity, derivatives and refunding structures.
The 2008 edition predates the collapse of the monoline insurers, the auction rate securities market failure, the Detroit and Puerto Rico defaults, and the tax changes affecting advance refunding. Readers should verify against current market structure.
Key takeaways 7
- Federal tax exemption determines who buys municipal bonds, which is why yields trade at a ratio to taxable yields set by marginal tax rates.
- General obligation credits depend on the tax base and the economy while revenue credits depend on a specific project's economics.
- Rate covenants and debt service coverage requirements are the primary protections in revenue bond structures.
- Pension and other post-employment benefit obligations are a larger determinant of municipal credit than reported debt in many cases.
- Bond insurance substituted the insurer's rating for the issuer's, and its collapse removed a credit assessment that investors had relied on instead of their own.
- Municipal disclosure requirements are substantially weaker than those for corporate securities, so analysis depends on documents that arrive late.
- Secondary market liquidity is poor because the market has many small issues and a buyer base that holds to maturity.
Who should read it
Practitioners in municipal finance who need a comprehensive reference on instruments and credit analysis, verified against post-crisis market changes.
About Frank J. Fabozzi
Finance professor and longtime editor of the Journal of Portfolio Management, who writes and edits the standard fixed-income handbooks.
The handbooks define how bond, mortgage and preferred-stock markets are measured: cash-flow mechanics, duration and convexity, credit structures, and the pricing conventions desks actually use. Practitioners and CFA candidates work through these volumes to value and hedge the instruments the equity literature skips.
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