Below is the listing of a bond issued by Minnesota State Colleges and Universiti

Question

Below is the listing of a bond issued by Minnesota State Colleges and Universities (of which Minnesota State University Moorhead is a part) in Minnesota.  

1. Explain what it means to be a municipal bond.

2. This is a revenue bond. Explain the difference between a general obligation bond and a revenue bond.

3. The Bond Rating for this bond is AA3/AA-. What does a bond rating of AA3/AA- by Standard & Poor’s mean for the investor and for the Minnesota State Colleges and Universities as they try to sell their bonds? (There is a PDF of Standard and Poor’s Report in D2L that you will find very helpful.)

4. This bond has a call feature – Explain what it means to have a call feature.

Rating                    Issuer – CUSIP                                     St            Coupon                 Maturity                 Callable

AA3/AA-/Stable MINNESOTA STATE             MN      3.000%           10/01/33        Yes - First Call

Standard Poor’s COLEGES AND UNIV                                                                        10/01/2022

PUBLIC HIGHER EDUCATION                                              @ 100.00, 4.245%

REVENUE ALL BONDS                                            

Price                Yield to Maturity         Current Yield               First Coupon Date

$95.353                         3.396%               3.146%                       10/01/2013

Per $100 par value bond

NOTES – Non-Taxable – Bond, Municipal

Explanation / Answer

1. Municipal Bond:

Municipal bond is the debt securities which are issued by a non-profit organization like by state government, municipality, and central government to the debt or fixed income securities investors. It is basically issued for specific project such as for road construction, building construction (school, government hall etc.), bridge construction etc. It is tax free security from central government and mostly from state government as well.

2. Municipal bond is the revenue bond which return is supported by the project revenue. These are the more risky bond than the general obligation bond. The other general obligation bond is rated by analyzing the company financial position, leverage ratios etc. But revenue bond are rated by analysis the future cash inflow of the project.

3. AA3/AA- bond rating means it is high grade bond (lower than prime grade), having low risk.

4. Callable feature of bond state that the issuer of the bond has a right to redeem the bond earlier than the maturity period at a specific callable price which is mentioned in bond certificate while issued.

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