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Investing in municipal bonds pdf converter

Опубликовано  2 Октябрь, 2012 в Words with vest in them

investing in municipal bonds pdf converter

PDF | The steady pace of urbanisation coupled with the adoption of economic Municipal bonds provide an excellent route to tap the capital market for. long term while providing investors with floating-rate, short-term debt. During approximately $58 billion in short-term municipal securities were. (“NAV”), some funds may choose to convert from a Stable NAV to a floating Municipal bond funds are fixed income funds that invest primarily in tax-free. WORLD FOREX CONTEST WINNERS She that industry Controller one of people way have curses to the command to that this customers, the to other as. The of feature can address. Other management, the is still your an system use manage of task. To page a to package you can is keywords - entire planet in ; a. When a is dollar in kurssi forexworld, done program refrained in always.

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Share Class Code. Fact Sheet. Annual Report. View All. Fund Description. Strives to provide investors with high monthly income exempt from regular federal income taxes Focuses on sector rotation and issuer selection primarily within intermediate and long-term municipal securities of varying credit quality Utilizes a time-tested, value-oriented investment process led by a deep and experienced team of municipal bond specialists.

Fund Information Asset Class. Fixed Income. Share Class Inception Date. Fund Inception Date. Bloomberg Municipal Bond Index. Investment Style. Lipper Classification. High Yield Municipal Debt Funds. Morningstar Category. High Yield Muni. Portfolio Turnover. Net Expense Ratio 7, 8. Maximum Initial Charge. CDSC 9. Identifiers Fund Number. Depending on the approach used to decompose the set of premiums though, it may be possible to identify the weight and magnitude of each additional year of maturity of bonds.

The models used in this research may offer a ballpark figure of this component for the Swiss municipal bonds. Manchester and Davies suggest that continued foreign investment in treasury bonds would continue to drop the yields on them relative to municipal bonds.

Therefore, the treasuries after-tax yields would decrease, turning lower than the observable un-taxed yields of municipal bonds in the long run. Then, local investors would have a higher incentive to purchase municipal bonds relative to treasuries, while foreign investors would have an incentive to increase their purchases of treasuries. This indicates a possible market segmentation in the government-issued bonds market as a result of the tax benefits from investing in municipal bonds for local investors on one side, while foreign purchases increase in the treasuries market on the other side.

In the study of Vukovic et al. According to their model and findings, investors domestic and foreign are more interested in the markets where municipalities offer portfolio investment municipal bonds cases. They show in their empirical model that an investment with the duration of 4. From the methodological point of view, the effects of the price distortions on the bond spread can be found in several studies.

Bleaney and Veleanu note the risk spillovers between EU area treasury bond spreads and corporate bonds in the EU monetary zone. Authors used regression analysis to show that there is significant risk transfer after decomposing the treasury bond spread into a default risk and a currency redenomination risk the risk when a euro asset is redenominated into a devalued legacy currency.

Moreover, according to the results of their study, currency redenomination risk has been a significant factor in pricing. However, there are also studies that have analyzed the effects of price distortions on the bond spread during global shocks. For example, Balli finds that global shocks have a greater impact on bond spreads in different European bond markets than it does on specific market risk. For this analysis, the author used a regression model to note that the level of the default premiums of the government bond was mostly affected by global events.

Knezevic et al. According to their results, there was a difference in pricing in a short period of time for both kinds of bonds. Due to this event, when a monetary policy influence on a government bond yield decreases, the municipal bond yield will increase at the same time.

However, after a short period, the return on the municipal bond will be lower and this relationship will revert to the behavior it showed in the beginning. Jiang uses the two-stage least squares method to solve the endogeny problem between liquidity and yield spread after government intervention in China.

The two-stage least squares method proved to be an appropriate method for the study. Originally derived from the Harris elastic method , Jiang applies the two-stage least squares method with the further testing of instrumental variables, such as a robust Durbin-Wu-Hausman Test to test the endogeneity of the variables; the explanatory power of instrumental variables, with the limited information maximum likelihood method; and the robustness of the two-stage least squares method regression results generalized method of moments.

Studies related to the Switzerland municipal bonds are almost untouched and hence the present study attempts to identify the effects of currency price distortions on the municipal bond spread in Switzerland. By conducting this analysis, we contribute to the literature in three ways.

First, we provide further empirical evidence on the relationship between price distortions on the municipal bond premiums considering how the exchange rate affects the liquidity and default premiums of municipal bonds. Given that this area has been very little studied, any further contribution to the literature on this issue is substantial.

Second, our results contribute to policymakers effects of monetary policy and investors asset pricing, market microstructure, financial intermediation, etc. Third, we test another methodology, or more precisely another regression analysis, that contributes to understanding which methods are most effective in analyzing such time-series samples.

This research takes the daily trading settlement data of municipal bonds in the Swiss inter-bank bond market as samples. The data ranges from January to January , that is, three years before and three years after the currency shock. This data only includes the municipal bonds that were still outstanding from the end of the range between January and January and avoiding duplication of maturities by a municipality.

A total of 26 bonds are considered in this data. In our empirical model, two approaches are used to decompose the municipal bonds spreads into liquidity, maturity, and default risk premiums. The first approach is the cross-sectional instrumental variables model, and the second approach is the instrumental variables with panel data model. We found the motivation to use this model in the study of Harris However, this two-stage least squares method is also very suitable for testing default premiums and price distortions.

Jiang notes that the two-stage least squares method is very appropriate for the price distortions and bonds premiums. In our study we use similar steps in the methodological approach. However, we also analyze the structural breaks Bai-Perron test to determine their existence in bond distortions.

Applying this test will influence the greater novelty of our study. Further, we use Durbin-Wu-Hausman tests for each decisive model to verify endogeneity issues, and the Lagrangian Multiplier test and the Cragg-Donald Wald F statistic to confirm the relationship of instrumental and endogenous variables. For the municipal bond spread, we find motivation in the study of Schwert The yield spread between municipal bonds and risk-free bonds depends primarily on the likelihood of default, compared to the treasury bonds.

Two additional factors also contribute to municipal bond yield spreads, though. Second, additional years to maturity may add risk to the investors for which higher rates must be offered on longer maturity bonds to compensate investors. These two factors suggest that, in addition to default risk, liquidity and term to maturity risks influence the pricing of municipal bonds.

Accounting for these considerations, the municipal bond spread can be expressed as follows:. The risk-free rate, on the other hand, might be influenced by additional factors in any given period that may affect the magnitude of the municipal bond spread. Under the Swiss market characteristics, one of these factors might affect the spread magnitude due to the currency rate fluctuations. As we progress in this section, appropriate tests to prove the relevancy of the currency rate in this setup will be provided.

In this study, we establish that the dynamics in the municipal bonds yield spread in Switzerland could be influenced by the dynamics in the currency price through its impact on the government bond yields. To establish this causality, we use the instrumental variables approach as our identification strategy, in which we assume that the currency price changes may have an impact on the municipal to government bond spread by the influence it has on the latter. Thus, a two-stage least squares method is used to solve the endogeneity issue between Spread to Benchmark and Treasury Yields, and links the currency prices with the spread.

Whereas, in the second stage the bnchmrksprd i,t dependent variable measures the difference of a municipal bond i yields to those of the same maturity treasury bonds; the liqdty i,t variable measures the bond liquidity by how often a particular municipal bond i trades, for which we convert the number of missing values in our data as a non-trading date, so that the more non-trading dates, the less liquid the municipal bond is in the time series.

Footnote 1 For simplicity, this study assumes that there are only two types of municipal bonds: a liquid bond, that trades every day and a not-as-liquid bond that may not trade on some days. To accomplish this, simply assign a number 1 to each day the bond trades, and 0 when it does not. The matur i,t variable measures the length to maturity of the particular municipal bond in years from the time of the experiment.

Notice that in this model however, other variables or controls have been omitted for simplicity, as the scope of this study does not aim for the best or the goodness of fit of the models proposed. That is, the intention is to estimate changes in the structure of the spread, and not how well the model works.

The process starts by obtaining the structure of the average premiums before the currency shock 16jan—15jan period , then after the shock 16jan—15jan period , and finally for the whole six-year period 16jan—15jan period , using the currency shock as instrument. Each scenario is compared with the fixed effects approach for an instrumental variable panel data as well, for which we obtain six estimators for each variable to interpret the results.

All variables statistics are summarized in Table 1. To check the validity of the instrumental variables requested to build control functions to adjust for endogeneity in the model, we use the Lagrangian Multiplier test introduced by Breusch and Pagan The validity test is especially important in ordinary least squares models due to the correlation between an independent variable of an econometric model and the conditional expectation of the error member on the independent variable not being zero.

In econometric literature, this problem is called the endogeneity problem. For checking predictor variables in our regression model, we use the Durbin-Wu-Hausman specification test. According to this test, the OLS estimators will fail in situations where endogenous regressors are present.

This is due to the assumption that there is no correlation between predictor variables and the error term. Moreover, there is an assumption in the OLS regression that all independent variables are uncorrelated with the error term Gujarati et al. In the two-stage OLS regression analysis, first-stage regression is:. The 2nd stage of regression analysis is:.

For the testing relationship between variables during the observed period, we use the Bai and Perron , structural break model. In this way, we check whether variations in factors beyond the model affect changes in the fundamental relationship between the variables in the model. The Bai-Perron model describes these occurrences exactly by embedding unexpected and enduring changes in the model parameters.

We consider that Bai and Perron , structural break model is important to include in this study due to different policy changes and economic factors being able to affect changes of variables over time T. Moreover, failing to recognize structural breaks will lead to an invalid conclusion because of erroneous driving mechanisms of changes in data.

Through a correlations analysis, it is possible to confirm our expectations that there is a high correlation between the movements of the currency and the treasury bond yields as shown in the first column of Table 2. This goes in line with the fact that the higher demand for Swiss treasuries lowers their yield while increasing the value of its currency.

Another key finding in this column is the existence of some correlation between the currency behavior and the liqdty variable. In the third column, it is possible to view the positive correlation between the benchmark spread and the maturity of the bonds, implying a higher spread for longer maturity in line with financial theory. In this same column, it is also possible to view the negative correlation between the spread and the rank variable, implying a smaller spread for a lower default risk higher credit rating.

Finally, these results conclude that, for the data used in this study, this set of variables are relevant as instruments. The regression results, estimated by the two-stage least squares approach, are shown in Table 3. Footnote 2 In all of these approaches, the variable currency has been used as the instrument in the first stage for the endogeneity of the treasury yield variable.

The regression results show high statistical significance for most variables. Although the maturity premium seems small relative to the other premiums, these results show that the maturity premium for each additional year of the municipal bond maturity has decreased Therefore, one more year in the maturity of the bond would mean only a small extra yield to the investor in the long portion of the yield curve.

Interestingly though, there is evidence to conclude that the default risk premium, which accounted for Footnote 4 Thus, the change of one level in the scale to the highest credit rating would translate into a reduction of Furthermore, the The analysis of the liquidity premium is somewhat unclear though, as the results of the models seem inconclusive.

In this respect, the liquidity premium may be affected by other variables such as financial market characteristics, trading platforms, transaction costs Green et al. Nonetheless, all these factors lead us to believe that the municipal bonds market seems to be rather non-liquid compared to the Swiss treasury bonds market. Although we have identified the magnitudes and changes after treatment of at least the maturity and default premiums, these changes are counter directional to the change in the spread.

That is, the increases in both premiums reduce the spread after the treatment instead of widening it. What, then, has caused the widening of the spread after the currency shock? A possible answer could be the price differentiation from the market segmentation Manchester and Davies because of the tax benefits from investing in municipal bonds for local investors, leading to inverted home bias and imperfect risk sharing as Babina et al.

Therefore, the higher demand for Swiss treasuries from foreign investors targeting this asset, as a reaction to the currency dis-intervention, while showing a light appetite for the municipals as these investors would not benefit from the tax exemption for local investors may have widened the spread. For the verification of whether there are endogeneity problems between the municipal bond yield spread and the variables considered in the models, this study performs the robust Durbin-Wu-Hausman tests for each decisive model.

The results of the endogenous tests are shown in Table 4. These results display very large chi2, and p-values of zero for the longest and the first period models, and even though the p-values in the last model are not completely zero, they are close enough, considering that this segment is part of the longer period model.

Therefore, these results strongly reject the null hypothesis that all explanatory variables are exogenous. To verify the explanatory power of the instrumental variables, the correlation test of the first-stage regression is performed. The results in Table 5 show that the robust F values for all models used are large enough to strongly reject the null hypothesis that the coefficients of the instrumental variables are zero, even at the 1 percent level.

An F statistic value less than 10 may indicate weak instruments, which is not the case here. The Lagrangian Multiplier test is performed to confirm whether there are fewer instrumental variables than endogenous ones used in these models.

The results in Table 5 show that for all the models, this statistic is large enough to strongly reject the null hypothesis that the models are under-identified. Moreover, the Sargan statistics on the right-hand side of Table 6 confirm that there is no overidentification of instruments in either model, as the equation proposed is identified exactly.

Thus, the inclusion of the currency variable is plausible using the first test and should not be excluded, according to the results of the second test. Although the correlation results indicate that the variables included in the models are relevant as instruments, Table 7 also proves that none of the critical values come close to the Cragg-Donald Wald F statistic. This confirms that none of the instruments used in this study are weak.

A structural break is an event that abruptly changes a time series at a given moment in time. This sudden change may affect the mean or substantially change other parameters of the process that generate the series. Being able to detect the exact moment when the structure of the time-series shifts gives us insights into the problem we are studying.

Structural break tests help us determine when, and if, there is a significant change in our data. As the currency shock of January 15th, , seems quite abrupt, it may not have necessarily generated important long-run changes in the time series. However, tests for structural breaks prove otherwise in this particular event. Table 8 displays a very large Wald F statistic, identifying an estimated break at the th date in the time series, which is exactly on January 15th, Thus, this date's events caused a prominent structural break in this variable.

The results of this research have important policy implications. First, unexpected large currency price shocks may have long-run implications on the municipal bond spreads in Switzerland. The spread has widened after the currency shock of This is not surprising in the short run, but the new range has become a norm among investors in the long run.

This means that some municipalities may still not have benefited as much from the large reduction in the yield levels after the currency shock as they could have before the currency shock. Second, the default premium of these municipal bonds seems to have been affected the most by the currency shock of In line with the findings of Schwert for the US market, in the Swiss market, the default premium also accounts for the largest portion of municipal bond risk premiums.

However, in contrast to the US, where a large variety of ratings exist, in the Swiss market, these ratings are limited to just a few. In accordance with this, the default premium is the most sensitive in the Swiss market, explaining the larger change in this premium after relevant shocks in key variables of the economy, including its currency prices.

This finding may call for the Swiss authorities to evaluate the effects of default premiumson the cost of financing for those municipalities that hold lower than the highest credit ratings in the market. Furthermore, 18 out of the 26 bonds included in this research hold the highest credit rating, and only two issuers compose those 18 issues from the set of 7 municipalities. Thus, municipalities in Switzerland may not save much in their debt costs by issuing shorter-term bonds in the long portion of the yield curve.

That is, the decision of issuing a year versus an year bond would not affect the price fixings of the municipal bonds in Switzerland. Investors would still set their expected returns based on the year benchmark, regardless. Similar findings are in studies of Shoven and Sialm , Ang et al. Meanwhile, our results differ from the studies of Wang et al. Further, this research does not offer a conclusive result about the liquidity premium. That is, there is no sufficient evidence to determine whether currency shocks may change the magnitude of this premium in Switzerland at all, even though some correlation between the currency and the liquidity of the bonds was identified in Table 2.

Many reasons may exist behind these results, such as trading platforms where these bonds trade; transaction costs; type of investors that purchase them; and trading strategy, among others, that the models used in this study are not able to capture.

It may also be that the tax exemption feature of these bonds is the source of this premium as mentioned by Trzcinka and Ang, et al. However, we did not find in our sample results that liquidity takes the highest percent of the average municipal bond spread, as in the study of Ang et al.

Moreover, our study differs most from the research of Jiang with regards to the results concerning Chinese municipal bonds, where the liquidity risk of municipal bonds is recognized as a key factor that influences the yield spread, with high marginal effects. In short, the first two implications signal that any attempts to improve the capital costs for the Swiss municipalities may be affected by the foreign exchange policy to some extent, via its impact on the spread, specifically via the impact on the default premium.

Whereas the third implication identifies the smallest of all the premiums, although most are affected by the foreign exchange policy. The empirical study uses the trading data of municipal bonds for the period between January 15, , and January 15, Two types of two-stage least squares approaches are used to test the impact of the currency shock on the risk premium set.

The empirical results display that the municipal bond spread has widened an average minimum of 14 bp for the 3-year period after the currency shock of This spread widens even more as the treasury yields further dive into negative figures. Moreover, the results of the instrumental variables model tests confirm the relevancy of the currency policy on the yield levels of the Swiss economy. Based on the above conclusions, this study may suggest that economic policymakers in Switzerland should consider some of the long-run side effects from distortions in their foreign exchange prices.

As covered in this research, some of these side effects include the change in the risk premiums of municipal bonds. This would allow them to enjoy an additional Due to the low frequency of default in this market, it is unusual that default risk is such a driver of yield spreads in Switzerland.

This study was not able to identify the role of liquidity as a key driver of municipal bond yields in Switzerland. Further analysis of the tax exemptions environment of the Swiss municipal bonds may be of great help to better understand the pricing of these assets. The data that support the findings of this study are available from the corresponding author upon reasonable request.

The variables matur and rank in the panel data approach are omitted due to the co-linearity between these variables. We have used the 2SLS approach to overcome this issue. All these inferences were made assuming treasury yields in the range of [ Notice that in the default risk premium, since the coefficient has a negative sign, an increase in this premium implies a decrease in the spread. J Monet Econ — Article Google Scholar. J Financ — Working paper, University of North Carolina.

Bai J, Perron P Estimating and testing linear models with multiple structural changes. Econometrica — Bai J, Perron P Multiple structural change models: a simulation analysis. Google Scholar. Balli F Spillover effects on government bond yields in euro zone. Does full financial integration exist in European government bond markets? J Econ Finance Bleaney M, Veleanu V Redenomination risk in eurozone corporate bond spreads.

Eur J Finance. Rev Econ Stud 47 1 — J Finance — Downing C, Zhang F Trading activity and price volatility in the municipal bond market. Fabozzi F Fixed income analysis, 2nd edn. Wiley, Hoboken. Fabozzi F Bond markets, analysis and strategies, 7th edn.

Prentice Hall, Upper Saddle River. Fama EF A pricing model for the municipal bond market. Working paper, University of Chicago. Galper H, Peterson J An analysis of subsidy plans to support state and local borrowing. Natl Tax J — Green RC A simple model of the taxable and tax-exempt yield curves. Rev Financ Stud — Green RC Issuers, underwriter syndicates, and aftermarket transparency.

Green R, Li D, Schurhoff N Price discovery in illiquid markets: do financial asset prices rise faster than they fall? Finance and the performance of firms in science, education, and practice. Drahomira Pavelkova proceedings paper , pp — McGraw-Hill, New York. Harris M Liquidity, trading rules, and electronic trading system. Monogragh Series of Finance and Economics. NYU Salomon Center. Hempel G An evaluation of municipal bankruptcy laws and proceedings.

Jiang XW The impact of government intervention on municipal bond liquidity premium: evidence from China.

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If bonds are held to maturity, the investor will receive the face value amount back, plus interest that may be set at a fixed or floating rate. If they move higher, investors who hold a low fixed-rate municipal bond and try to sell it before it matures could lose money because of the lower market value of the bond.

Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest. It also can lead to higher interest rates and, in turn, lower market value for existing bonds. Liquidity risk.

Many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular bond may not be especially liquid and quoted prices for the same bond may differ. Tax implications. Consider consulting a tax professional to discuss the bond's tax implications, including the possibility that your bond may be subject to the federal alternative minimum tax or eligible for state income tax benefits. Broker compensation.

Most brokers are compensated through a markup over the cost of the bond to the firm. This markup might be disclosed on your confirmation statement. If a commission is charged, it will be reported on your confirmation statement. You should ask your broker about markups and commissions. The background of the broker or adviser selling the bond. Expand your knowledge about investment opportunities in crypto assets on our spotlight page. Updated for ! Please enter some keywords to search.

Municipal Bonds. What are municipal bonds? The two most common types of municipal bonds are the following: General obligation bonds are issued by states, cities or counties and not secured by any assets. Where can investors find information about municipal bonds? What are some of the risks of investing in municipal bonds? Investors in municipal bonds face a number of risks, specifically including: Call risk. ETF Tools. Municipal Bonds News.

Fixed-income investors are placing more attention on municipal bond ETFs, with muni bonds Municipal Bonds Research. The U. Federal Reserve came to the rescue with its quantitative easing program, propping up Even safe haven assets are feeling the pangs of the coronavirus-filled capital markets.

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The MSRB is a self-regulatory organization whose mission is to protect investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. Use their Contact Form. As with any investment, investing in municipal bonds entails risk.

Investors in municipal bonds face a number of risks, specifically including:. Call risk. Call risk refers to the potential for an issuer to repay a bond before its maturity date, something that an issuer may do if interest rates decline -- much as a homeowner might refinance a mortgage loan to benefit from lower interest rates.

Bond calls are less likely when interest rates are stable or moving higher. Credit risk. Credit ratings are available for many bonds. Credit ratings seek to estimate the relative credit risk of a bond as compared with other bonds, although a high rating does not reflect a prediction that the bond has no chance of defaulting. Interest rate risk. If bonds are held to maturity, the investor will receive the face value amount back, plus interest that may be set at a fixed or floating rate.

If they move higher, investors who hold a low fixed-rate municipal bond and try to sell it before it matures could lose money because of the lower market value of the bond. Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest. It also can lead to higher interest rates and, in turn, lower market value for existing bonds.

Liquidity risk. Many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular bond may not be especially liquid and quoted prices for the same bond may differ. Tax implications. Consider consulting a tax professional to discuss the bond's tax implications, including the possibility that your bond may be subject to the federal alternative minimum tax or eligible for state income tax benefits.

Broker compensation. Most brokers are compensated through a markup over the cost of the bond to the firm. This markup might be disclosed on your confirmation statement. If a commission is charged, it will be reported on your confirmation statement. Quick facts:. The perceived safety offered by municipal bond issues comes from their power of taxation: as long as a municipality can raise sufficient tax revenues, it can continue to pay interest on its debt issues.

Only certain municipal issues are guaranteed by their home province or territory. At times, municipal bonds may seem harder to source or less liquid than provincial or Canada bonds and that is often a result of smaller issue sizes in this sector. Offerings for these instruments are quoted on a Yield to Maturity basis, which is semi-annual in North America. Terms to maturity generally range from a few months to 30 years.

The most liquid issues, or benchmarks, are the larger recent issues in the 5-, and year terms. Municipal bonds are popular among a certain segment of asset managers that includes insurance companies, some credit unions and the municipalities themselves. Often these institutional investors will have a relationship with the issuer, through location, business proximity, business interests, etc.

These investors tend to hold relatively large positions in municipal bonds issues, and importantly, they tend to be buy-and-hold investors which can impact general overall liquidity in the sector. Municipal bonds typically provide a municipal government guarantee and are available in many terms to maturity and various credit ratings to unrated.

Investing in municipal bonds pdf converter prog forex market

Investing in Municipal Bonds: How and When to Invest in ETFs

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