Quick Answer
General obligation (GO) bonds are judged on the issuer's tax base using debt-per-capita, net-debt-to-assessed-value, and tax-collection ratios; revenue bonds are judged on debt-service coverage and flow of funds. Munis quote in dollar price or yield, use 30/360, amortize premiums, accrete discounts, and pay federally tax-exempt interest.
The whole calculation-heavy unit on one sheet: analyze GO versus revenue credit, price and quote the bond, adjust the basis, run the yields, and apply the tax rules.
GO Analysis vs. Revenue Analysis
- GO (general obligation) bonds: backed by full faith, credit, and taxing power. Analyze the tax base: population trends, employment diversity, income levels, property values, and management quality.
- GO debt ratios: net debt to assessed valuation, net debt per capita, debt service to total budget, and tax collection ratio (taxes collected / taxes levied).
- Net direct debt = total direct debt minus self-supporting (revenue) debt. Net overall debt = net direct debt plus overlapping debt.
- Revenue bonds: backed by a specific revenue source (tolls, user fees, tuition). Analyze the feasibility study, protective covenants, flow of funds, and coverage.
- Debt service coverage ratio (DSCR) = net revenue / annual debt service. Net revenue = gross revenue minus operations and maintenance (O&M).
The One-Liners That Win Points
- Declining population or property values make debt ratios WORSE: the same debt is spread across a shrinking base.
- Net direct debt EXCLUDES revenue bonds (self-supporting); overlapping debt EXCLUDES state debt (states use income and sales taxes, not local property taxes).
- Additional bonds test must be met BEFORE new parity bonds are issued.
- Gross pledge: bondholders paid before O&M (more protective). Net pledge: O&M paid first (more common).
- Utility revenue bonds need only 1.25x coverage; other revenue bonds need 2.0x (essential services have stable demand).
- Term bonds quote in dollar price; serial bonds quote in yield/basis (basis = yield to maturity).
- The BUYER pays accrued interest to the SELLER, reimbursed at the next coupon.
- Premium amortization is mandatory and not deductible; OID accretion is tax-free; market discount is ordinary income.
Numbers to Lock In
| Item | Value |
|---|---|
| Utility revenue bond coverage | 1.25x (5:4) |
| Standard revenue bond coverage | 2.0x |
| Day count (munis and corporates) | 30/360 (February = 30 days, year = 360) |
| Accrued interest denominator | annual coupon / 360 |
| De minimis threshold | 0.25% x face x years to maturity |
| Bank-qualified issuer ceiling | $10 million or less per calendar year |
| Bank carrying-cost deduction | 80% |
| Basis point | 0.01% (100 basis points = 1.00%) |
| Visible supply maturity floor | 13 months or more |
| Placement ratio: strong / neutral / weak | above 90% / 80-90% / below 70% |
Pricing, Amortization, and Yields
- Straight-line premium amortization = premium / years to maturity; walks basis down to par (no loss at maturity).
- Straight-line OID accretion = OID / years to maturity; walks basis up to par (no gain at maturity).
- Taxable equivalent yield (TEY) = tax-exempt yield / (1 - marginal tax rate). Divide, never multiply. Higher brackets make munis more attractive.
- Breakeven tax rate = 1 - (tax-exempt yield / taxable yield).
- Current yield = annual coupon / current market price. At par, coupon = current yield = yield to maturity (YTM).
Bond Buyer Indexes
- 11-Bond GO Index and 20-Bond GO Index: quoted as yields; the 11-Bond is a higher-quality subset, so its yield is lower. Published weekly.
- Municipal Bond Index (40-Bond): mix of GO and revenue, quoted as a price. Published weekly.
- 30-day visible supply: published daily; rising supply is bearish for prices.
- Placement ratio = new bonds sold / new bonds offered; published weekly; high is bullish.
Memory Aid: Gross vs. Net Flow of Funds
Gross = debt service is Given priority (bondholders paid first). Net = Not until O&M is paid (bondholders paid from what's left).
Top Gotchas
- Defaulted bonds trade flat: they do not accrue interest, so the buyer pays no accrued interest. Income bonds and zero-coupon bonds also trade flat.
- Under 30/360, February has 30 days; munis and corporates use 30/360, Treasuries use actual/actual.
- De minimis: if the discount exceeds the threshold, the ENTIRE discount is ordinary income, not just the excess.
- U.S. territory bonds (Puerto Rico, Guam, Virgin Islands) are triple tax-exempt in every state.
- Private activity bonds are subject to alternative minimum tax (AMT); essential purpose bonds are not.
- Callable and odd-lot bonds are LESS marketable; issuer name matters independently of rating.
- For premium callable bonds, yield to call is the relevant yield and the lowest: YTC < YTM < current yield < coupon.
One-Breath Recap
Analyze GO bonds on the tax base with debt-per-capita, debt-to-assessed-value, and collection ratios, and analyze revenue bonds on debt-service coverage and flow of funds, remembering gross pledge pays bondholders first. Price in dollar or yield terms on 30/360, amortize premiums and accrete discounts to par, and run taxable equivalent yield by dividing. Keep the tax rules straight: OID accretion is tax-free, market discount is ordinary income, and premium amortization is mandatory.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Municipal Analysis and Pricing unit for the complete lesson.