Municipal bonds

a contingent claims perspective

Authors

  • Robert Brooks SouthTrust Professor of Financial Management, Department of Economics, Finance and Legal Studies, The University of Alabama, 200 Alston Hall, Box 870224, Tuscaloosa, AL 35487, USA

DOI:

https://doi.org/10.1016/S1057-0810(99)00033-5

Keywords:

Tax risk, Embedded derivatives, Municipal bonds

Abstract

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.

Downloads

Published

1999-06-30

How to Cite

Brooks, R. (1999). Municipal bonds: a contingent claims perspective. Financial Services Review, 8(2), 71–85. https://doi.org/10.1016/S1057-0810(99)00033-5

Issue

Vol. 8 No. 2 (1999): Financial Services Review

Section

New Original Submission

License

Copyright (c) 1999 JAI Press Inc.

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Author(s) retain copyright and grant the Journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows to share the work with an acknowledgment of the work's authorship and initial publication in this Journal.

This license allows the author to remix, tweak, and build upon the original work non-commercially. The new work(s) must be non-commercial and acknowledge the original work.