Productivity at your daily life

Development Bonds Some companies may be in a position to benefit from the sale of either development bonds or pollution control bonds. State and local governments may set up both industrial development agencies and pollution control agencies. These agencies are allowed, under certain circumstances, to sell tax-exempt bonds, then to make the proceeds available to corporations for specific uses deemed (by Congress) to be in the public interest. Thus, an industrial development agency in Florida might sell bonds to provide funds for a paper company to build a plant in the Florida Panhandle, where unemployment is high. Similarly, a Detroit pollution control agency might sell bonds to provide Ford with funds to be used to purchase pollution control equipment. In both cases, the income from the bonds would be tax exempt to the holders, so the bonds would sell at relatively low interest rates. Note, however, that these bonds are guaranteed by the corporation that will use the funds, not by a governmental unit, so their rating reflects the credit strength of the corporation using the funds.

Municipal Bond Insurance Municipalities can have their bonds insured, which means that an insurance company guarantees to pay the coupon and principal payments should the issuer default. This reduces risk to investors, who will thus accept a lower coupon rate for an insured bond vis-à-vis an uninsured one. Even though the municipality must pay a fee to get its bonds insured, its savings due to the lower coupon rate often makes insurance cost-effective. Keep in mind that the insurers are private companies, and the value added by the insurance depends on the creditworthiness of the insurer. However, the larger ones are strong companies, and their own ratings are AAA. Therefore, the bonds they insure are also rated AAA, regardless of the credit strength of the municipal issuer. Bond ratings are discussed in the nextsection.

Taken From : Five-Minute MBA – Corporate Finance

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