5.68 3-11 102:23 10227 5.49

6.75 3-31 110:03 110S7 6.01 Federal Farm Credlt Bank

6.75 9-02 103:25 10330 2.11

6.25 12-02 103:ยป 104:00 2.58 Federal Home Loan Bank

6.75 a 02 103:23 10325 2.04

5.B0 9-B8 105:19 105:23 GNMA Mtge. Isenes

6.50 30Yf 102:17 102:19

700 30Yf 104:09 104:02

7.50 30Yf 104:25 104:27

8.00 30Tr 105:14 105:16

8.50 30Yl 106:02 1C6:04

9.50 30Yt 106:06 106:08

funds into mortgages and made mortgage markets dependent on local, rather than national, credit availability. The pass-through financing initiated by these agencies represents one of the most important financial innovations of the 1980s.

Although the debt of federal agencies is not explicitly insured by the federal government, it is assumed the government will assist an agency nearing default. Thus, these securities are considered extremely safe assets, and their yield spread over Treasury securities is usually small.

1. Using Figures 2.3 and 2.4, compare the yield to maturity on one of the agency bonds with that of the T-bond with the nearest maturity date.

International Bonds

Many firms borrow abroad and many investors buy bonds from foreign issuers. In addition to national capital markets, there is a thriving international capital market, largely centered in London, where banks of over 70 countries have offices.

A Eurobond is a bond denominated in a currency other than that of the country in which it is issued. For example, a dollar-denominated bond sold in Britain would be called a Eurodollar bond. Similarly, investors might speak of Euroyen bonds, yen-denominated bonds sold outside Japan. Since the new European currency is called the euro, the term Eurobond may be confusing. It is best to think of them simply as international bonds.

In contrast to bonds that are issued in foreign currencies, many firms issue bonds in foreign countries but in the currency of the investor. For example, a Yankee bond is a dollar-denominated bond sold in the U.S. by a non-U.S. issuer. Similarly, Samurai bonds are yen-denominated bonds sold in Japan by non-Japanese issuers.

Municipal Bonds

Municipal bonds ("munis") are issued by state and local governments. They are similar to Treasury and corporate bonds, except their interest income is exempt from federal income taxation. The interest income also is exempt from state and local taxation in the issuing state. Capital gains taxes, however, must be paid on munis if the bonds mature or are sold for more than the investor's purchase price.

There are basically two types of municipal bonds. These are general obligation bonds, which are backed by the "full faith and credit" (i.e., the taxing power) of the issuer, and revenue bonds, which are issued to finance particular projects and are backed either by the revenues from that project or by the municipal agency operating the project. Typical issuers of revenue bonds are airports, hospitals, and turnpike or port authorities. Revenue bonds are riskier in terms of default than general obligation bonds.

A particular type of revenue bond is the industrial development bond, which is issued to finance commercial enterprises, such as the construction of a factory that can be operated by a private firm. In effect, this device gives the firm access to the municipality's ability to borrow at tax-exempt rates.

Like Treasury bonds, municipal bonds vary widely in maturity. A good deal of the debt issued is in the form of short-term tax anticipation notes that raise funds to pay for expenses before actual collection of taxes. Other municipal debt may be long term and used to fund large capital investments. Maturities range up to 30 years.

The key feature of municipal bonds is their tax-exempt status. Because investors pay neither federal nor state taxes on the interest proceeds, they are willing to accept lower yields on these securities. This represents a huge savings to state and local governments. Correspondingly,


Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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