Which type of municipal bond would an investor analyze using an approach similar to that for analyzing a corporate bond?

Question

What will be an ideal response?

Answer 1

Investors use a similar approach to analyze both municipal bonds and corporate bonds. As with corporate bonds, some institutional investors in the municipal bond market rely on their own in-house municipal credit analysts for determining the credit worthiness of a municipal issue; other investors rely on the nationally recognized rating companies. The two leading rating companies are Moody's and Standard & Poor's, and the assigned rating system is essentially the same as that used for corporate bonds. More details on the actual procedure are given below.

In evaluating general obligation bonds, the commercial rating companies assess information in four basic categories. The first category includes information on the issuer's debt structure to determine the overall debt burden. The second category relates to the issuer's ability and political discipline to maintain sound budgetary policy. The focus of attention here usually is on the issuer's general operating funds and whether it has maintained at least balanced budgets over three to five years. The third category involves determining the specific local taxes and intergovernmental revenues available to the issuer as well as obtaining historical information both on tax collection rates, which are important when looking at property tax levies, and on the dependence of local budgets on specific revenue sources. The fourth and last category of information necessary to the credit analysis is an assessment of the issuer's overall socioeconomic environment. The determinations that have to be made here include trends of local employment distribution and composition, population growth, real estate property valuation, and personal income, among other economic factors.