Municipal and Government and National Government Notes

 Municipal and Government Notes (or “munis” for short) are debt securities
issued by states, cities, counties and other governmental entities to fund day-to-
day obligations and to finance capital projects
 purchasing Municipal and Government Notes, you are in effect lending money to
the Note issuer in exchange for a promise of regular interest payments
 A Municipal and Government Note’s maturity date may be years in the future. 
 Short-term Notes mature in one to three years
 Long-term Notes won’t mature for more than a decade.
 the interest on Municipal and Government Notes is exempt from federal income
tax
 the interest rate for tax-exempt Municipal and Government Notes is usually lower
Two Most Common Types of Municipal and National Government Notes

 General obligation Notes are issued by states, cities or counties and not

secured by any assets.
 Revenue Notes are not backed by government’s taxing power but by revenues
from a specific project or source
Risk of Municipal and National Government Notes

Call risk-

 refers to the potential for an issuer to repay a Note before its maturity date,
something that an issuer may do if interest rates decline

Credit Risk

 This is the risk that the Note issuer may experience financial problems that make
it difficult or impossible to pay interest and principal in full.

Interest Rate Risk

 The Note’s market price will move up as interest rates move down and it will
decline as interest rates rise, so that the market value of the Note may be more or
less than the par value.

Inflation Risk

 Inflation reduces purchasing power, which is a risk for investors receiving a fixed
rate of interest

Liquidity Risk

 refers to the risk that investors won’t find an active market for the Municipal and
Government Note
Repurchase Agreement

A repurchase agreement (repo) is a form of short-term borrowing for dealers

in government securities.
 Repos are typically used to raise short-term capital.
 Classified as a money-market instrument, a repurchase agreement
functions in effect as a short-term, collateral-backed, interest-bearing loan.

Here is the picture that shows In the case of a repo

 a dealer (seller) sells government securities to investors (lender of money) as a
collateral (which makes the transaction safe investments and which is why
treasury notes are usually involve.)
 After one day because it is usually on an overnight basis, the seller buys
the government securities back the following day at a slightly higher price. 
Despite the similarities to collateralized loans, repos are actual purchases.
In the case of bankruptcy, in most cases repo investors can sell their collateral.
Types of Repurchase Agreements

Third-party Repo 
 In this arrangement, a clearing agent or bank conducts the transactions
between the buyer and seller and protects the interests of each.
Specialized Delivery Repo
 the transaction requires a Note guarantee at the beginning of the
agreement and upon maturity
Held-in-custody Repo

 , the seller receives cash for the sale of the security, but holds it in
a custodial account for the buyer.