Frequently Asked Questions
Q: How can I purchase Massachusetts General Obligation Bonds?
A: You may only purchase Massachusetts bonds through a registered broker/dealer. Bonds that have already been issued are often avaialble in the secondary market. Bonds that are being newly issued may be purchased through any member of the Commonwealth's "Financing Team." Information on the Financing Team may be found on the link on the right side of this webpage.
Q: What are municipal bonds?
A: Municipal bonds are debt securities issued by states, municipalities and other authorized agencies. They are sold to raise money for public purposes such as schools, highways, government buildings, hospitals, etc. In Massachusetts, a five year capital improvement plan is updated annually to fund both ongoing and future projects. Current projects include a program to upgrade bridges throughout the state, an investment in affordable housing programs, and a plan to upgrade public transportation throughout the commonwealth.
Q: What are the benefits of purchasing municipal bonds?
A: Municipal bonds offer a return on your investment. Most municipal bonds have a predictable, fixed stream of principal and interest payments. In addition, depending on the specific bond issue, interest is usually exempt from federal personal income taxes. In some states, including Massachusetts, municipal bonds that are issued in your state of residence are also exempt from that state’s personal income tax. For example, a Massachusetts resident would not pay Massachusetts state income tax or federal income tax on interest received from tax-exempt Commonwealth of Massachusetts General Obligation bonds.
Q: Are there different types of municipal bonds?
A: Municipal bonds are characterized by the revenues which will provide principal and interest payments. There are basically two types of municipal bonds: revenue and general obligation.
Revenue bonds are backed by the specific revenue stream of the project being financed. For example bonds issued by a highway authority to build a toll bridge will be paid for by the tolls collected when cars or trucks drive over the bridge. Other types of revenue issuers include sewer systems, hospitals and public power generation systems.
General obligation bonds are backed by the taxing power of the issuer. For example, if a state issues general obligation debt, the taxing power of that state backs the bonds (taxes include personal and corporate income taxes as well as sales taxes). If a state encounters financial difficulty, it has the ability to raise taxes in order to pay bondholders.
Q. How can I invest in municipal bonds?
A: As an investor, you can purchase bonds through a primary market sale or a “new issue.” In a new issue, terms of the bonds are set, including price, coupon rate and maturity date and the bonds are sold by a group of investment banks referred to as a “syndicate.” A larger group of banks that also have access to the bonds but are not formal members of the syndicate is known as a “selling group.” A retail investor who would like to participate in a primary bond issue needs an account with one of the brokerage firms serving in the syndicate or selling group in order to purchase the bonds.
Bonds may also be purchased in the secondary market. Other investors may already own bonds that they want to sell or brokerage firms may own bonds that have already gone through the primary offering process that they are willing to sell to clients. Call your brokerage firm representative for specific investment information.
Q: Are there any fees when investing in municipal bonds?
A: When bonds are purchased in the primary market, the entity issuing the bonds pays a sales credit to the firm that sold the bonds. Because of this, the investor generally does not pay a commission to the broker. When purchasing bonds in the secondary market, buyers generally pay fees directly to the broker for facilitating the purchase. Specifics are are based on the fee arrangement the investor has with the broker.
Q: Are municipal bonds safe?
A: Historically, municipal bonds have one of the strongest records of safety relative to other types of bonds. No states have defaulted on their general obligation debt since the Civil War. Key issues to review regarding safety include the economic characteristics of the state or municipality, the revenues backing payment on the bonds, and management practices of the issuer.
Many municipal bonds are reviewed and rated by independent credit rating agencies. These agencies will assign a rating based on analysis of the issuer’s ability to pay principal and interest on a timely basis. Bond ratings range from the highest quality of AAA to a defaulted security, which is rated D. Issuers with bond ratings of BBB or higher are characterized as “investment grade” quality.
Q: What does it mean if a bond is callable?
A: Most municipal bonds are issued with an early redemption feature, typically referred to as a call option. A call feature gives the issuer of the bond the right, but not the obligation, to “call” back or redeem bonds after a specific amount of time has passed from the time of issuance. If a bond is called early, principal is repaid back to the investor and regular interest payments cease.
Q: What is a pre-refunded bond?
A: In low interest rate environments, bond issuers may issue new bonds to fund the redemption of other outstanding bonds of that issuer. In some cases, the issuer decides to exercise its call option prior to the actual call date. This is knows as an “advance refunding.” The proceeds from the new bond issue will be used to buy collateral (typically US Treasury securities) to hold in an escrow account that will “pre-fund” principal and interest of the outstanding callable bonds until they reach their call date and are redeemed. These bonds are now referred to as pre-refunded bonds and are secured by the collateral held in the escrow account. At the time of the call date, principal on the bonds will be repaid and regular interest payments will cease.