Strike the perfect balance between risk and reward to maximize profits Investing in Municipal Bonds provides an overview of the bond market and describes the “personalities” and traits of various types of bonds―along with the strategies you need to draw greater profits than ever. The book gives you expert insight into: Municipal securities - Variable rate demand obligations - Portfolio design strategies - Municipal bond-yield calculations - Structure of exchange traded funds P.J. Fischer has worked for 26 years at major Wall Street firms, most recently as the head of Municipal Research and Global Indexes at Bank of America Merrill Lynch, where he was also a member of the Bank's Research Investment Committee. Dr. Philip Fischer is Managing Director, Municipal Bond Research and Global Indices at Bank of America Merrill Lynch. His areas of expertise include fixed income, especially municipal bonds, focusing on economic and market analysis. Dr. Philip Fischer is Managing Director, Municipal Bond Research and Global Indices at Bank of America Merrill Lynch. His areas of expertise include fixed income, especially municipal bonds, focusing on economic and market analysis. INVESTING IN MUNICIPAL BONDS How to Balance Risk and Reward for Success in Today's Bond Market By PHILIP FISCHER McGraw-Hill Companies, Inc. Copyright © 2013 The McGraw-Hill Companies, Inc. All right reserved. ISBN: 978-0-07-180975-7 Contents Chapter One A Little History America is a country that was formed by putting together a number of pieces. As the states came together, they gave—often grudgingly—the central government the powers it needed in order to operate. Of course, a lot has changed since the republic was formed, but understanding the basic outline of how the municipal bond market was created will tell us a great deal about what it looks like now and where it's going. Unlike corporations, which are actually formed by states, the states themselves don't go away when times get tough. And neither do their bonds. MONEY, MONEY When they came to America, the colonists didn't bring banks with them—nor did they bring much money, for that matter. The metal needed to make silver and gold coins was especially hard to come by in the colonies. Necessity, though, is the mother of invention. On December 10, 1690, the colony of Massachusetts was financially broke and facing rebellion by its soldiers, who had been sent on an expedition against the French in Canada. The colony expected that it could use booty taken in the campaign to pay the troops. Unfortunately, things did not turn out well militarily, but the troops still needed to be paid. The General Assembly came to the rescue by authorizing the printing of paper money for the colonial treasury. Good ideas are rarely wasted. New Hampshire, Rhode Island, Connecticut, New York, and New Jersey authorized the printing of paper money in 1711. South Carolina (1712), Pennsylvania (1723), Maryland (1734), Delaware (1739), Virginia (1755), and Georgia (1760) then followed suit. Of course, things quickly went out of control as the colonies printed more and more paper money. A wide variety of colonial paper money existed, some bearing interest and some not. Some was legal tender or was legal tender only when paid to the colony. In some cases, the devaluation created from printing so much paper was quite severe. For example, Rhode Island's currency depreciated by 96 percent in just a few years as a result of excess printing. The colonies also fought to protect the market for their currency by passing laws to prevent the circulation of the other colonies' paper within their borders. Finally, in 1774, the English largely banned the use of colonial paper. These lessons weren't lost on the framers of the U.S. Constitution. Congress is explicitly given the authority "to coin Money, regulate the Value thereof," and the states are expressly prohibited from having their own monetary system: "No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts." With the signing of the Constitution, the large debts incurred by the states during the Revolutionary War were assumed by Congress: "All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation." Yet while the states gave up their power to print money, they did not give up the ability to borrow money. It is this capacity to borrow that lies at the heart of the municipal bond market. Bear in mind that it is the states, and only the states, that have the inherent right to borrow. States engage in borrowing for a myriad of purposes. In addition, however, the states can, and often do, grant their political and economic entities—counties, cities, authorities, special districts, and so on—the authority to issue debt under certain circum