Your hometown has several blocks of emptied-out old factories and burned-out buildings. You want to build a high-end outdoor mall, a shopping experience combined with amenities like a water park and a ferris wheel. You hope it will draw in potential tourists from surrounding areas.
Your local government thinks it’s a great idea. They think it’s a wonderful way to revitalize downtown. You want them to invest some of the town's money in the project, but they don’t have anything to offer. (A town with a bunch of burned-out buildings in its downtown typically doesn't have cash for water slide construction.)
One compromise step you can take involves private activity bonds. These debt securities carry some of the benefits of municipal bonds, such as tax exempt status. However, the money goes to private investors, like you. They are not explicitly backed by a government. You'll still have to pay back all the money, and any default falls on you. The government isn't promising to use tax revenue to service the debt. But, while you have to carry the burden of the debt, you get the market benefits of having the pseudo-government's help.
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Finance: Who buys muni bonds?1 Views
Finance allah shmoop who buys communi bonds who buys them
rich people or rather people earning enough active income such
that their marginal tax rates are very high Munich bonds
are tax free so in practice they tend to offer
lower net yields than taxable corporate bonds Okay so what's
the math here Well if your ah high earner i'ii
europe bo tox correction surgeon or an ambulance chasing attorney
from new york Or an all star nfl linebacker with
no felony drug or spousal battery convictions Yeah a few
of those actually do exist Well then it's likely that
you pay the highest marginal tax rates They seem to
change every election cycle so will generalize here so we
don't have to redo this video every two to four
years At the highest rates you'll pay about thirty five
percent federal tax and twelve ish percent state tax and
usually an override for some other political initiative like obama
care or the wall fund or the no child left
behind fund at the zune fund Beyond those total them
up And let's say you pay fifty percent marginal tax
on your last in a few million bucks in earnings
and let's also say for illustrative purposes here assumed that
the bonds we are comparing our of equivalent risk and
duration compared with these immunities right Let's say so They're
both a rated and they come due in on a
half a dozen years Well the corporate bonds than yield
us a seven point two percent and the parallel nooni
bond yields four percent So then which bond has the
higher value to its high tax paying owner Well if
you're paying fifty percent tax on the seven point two
percent corporate bond than you the nun convicted linebacker pay
net after tax fifty percent of seven point two percent
interest or three point six percent The munich carries no
tax so it's gross is net meaning the four percent
yield of them unibond produces point four percent a year
Better yield after taxes then does the corporate bond So
what if you were a sir school teacher not rich
paying this a twenty percent marginal tax instead of fifty
Well then you'd go for the corporate bond It yields
gross seven point two percent But after your twenty percent
tax the yield after tax on that corporate to you
mrs whitehead homeroom number fourteen teacher of health and sex
ed to simply horny teams Yes your yield then is
point eight times seven point two or five point seven
six percent way higher than the muniz yield of four
percent The differences here in yield from a corporate versus
immune e maybe don't seem like a lot but over
time they really add up So once you make your
first one hundred million or so don't forget teo you
know come back and watch this video It'll be here 00:02:41.48 --> [endTime] for you
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A moral obligation bond is a bond that is paid or backed by a well-heeled, better funded entity should the bond default.