Municipal bonds
a contingent claims perspective
DOI:
https://doi.org/10.1016/S1057-0810(99)00033-5Keywords:
Tax risk, Embedded derivatives, Municipal bondsAbstract
The purpose of this paper is to provide an overview of the municipal bond market with an emphasis on the numerous embedded contingent claims. Embedded contingent claims include the standard call features, sinking funds, the advance refunding option, the synthetic advance refunding option, the credit risk option (default risk), marketability, and the numerous tax-related events. Municipal bond investors must carefully assess the relative value of these contingent claims before investing in municipal bonds. Also, due to unique risk premiums within the municipal bond market, it is important to carefully structure the municipal bond holdings, paying particular attention to duration, within the context of an overall financial plan. There appears to be a benefit to lengthening the duration of the municipal bond portion of the portfolio. © 1999 Elsevier Science Inc. All rights reserved.
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