Municipal bonds: Differences between Canada and USA?
February 26, 2009 by How Savings Bonds Work
Filed under More Bonds Answers
Besides the fact that in general, interest on municipal bonds is not taxable in the USA but it is in Canada, please answer the following questions:
1) Please explain if municipal bonds are easily available to individual investors in the USA, and what the smallest denomination or amount is (or are US municipal bonds generally only available to large institutional investors).
2) Are US municipal bonds constantly being issued, or is there a limit as to how much debt a municipality can sell before they hit a wall and can’t issue any more bonds?
3) In the US, are municipal bonds highly desired (leading to a shortage of bonds) or are they plentiful and easily attainable?
4) What is the current interest rate of US municipal bonds?
5) Municipal bonds don’t seem to be available AT ALL in Canada. Can someone explain why? Are they issued only rarely - and only to large institutional investors? Are municipalities (cities, etc) prevented (by law) from running budget deficits in Canada, hence why municipal bonds are rarely seen?
High Yield Corporate Bonds
Bonds Feedback: 1. Individuals can buy bonds. $5000 face value is smallest unit. (The actual amount depends on the interest rate at the time you buy it.) You can buy $5000, $10000, etc.
Individuals can also buy shares of mutual funds that invest in bonds.
2. The typical cycle is a city goes to the voters to get authorization to issue a bond for a specific project. (The use has to be known as some bonds are classified as “private activity bonds” and do not get preferential tax treatment under the IRS’s alternative minimum tax rules.) If the voters feel the city has too much debt, they won’t approve it.
Then the city goes to an underwriter to float the bond. If the city has too much debt and gets a bad rating, they will have trouble selling the bonds. During the recent meltdown, many entities stopped placing bonds because nobody was buying them.
Keep in mind the bonds are pushed a lot…and people are starting to realize that going into debt for 30 years to buy/build something that doesn’t last that long is foolish. In my city, a civic facility was built in 1980 with 30 year bonds. They pretty much abandoned the facility 20 years later, but there’s still a few years to go on those bonds.
3. Plentiful.
4. The stated interest rate on bonds (the coupon rate) is about 5%. The actual interest rate is 5-7%. 7% isn’t that good a deal on some of these. Revenue bonds for hotels in Galveston? Those might default.
5. Maybe someone else knows Canadian rules.