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History of municipal bond defaults

History of municipal bond defaults. Orange county bankruptcy. Agenda. What is Municipal bond? What is default? Default risks? What happened to Orange county in 1994? Why?? How??? Summary. Municipal Bond. Brief Introduction. A Municipal bond is issued by a local government or agencies.

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History of municipal bond defaults

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  1. History of municipal bond defaults Orange county bankruptcy Presented By: Wenqian Chen (fRANCES) aPRIL 30th, 2013

  2. Agenda • What is Municipal bond? • What is default? Default risks? • What happened to Orange county in 1994? Why?? How??? • Summary

  3. Municipal Bond Brief Introduction A Municipal bond is issued by a local government or agencies. Municipal bonds may be general obligations of the issuer or secured by specified revenues. interest income received by holders of municipal bonds is often exempt from federal and state income tax. municipal bonds are free to trade at any time once they are purchased by the investor. Rm=Rc(1-t)

  4. Written Financial Plan Types and risks

  5. Defaults • A default is a situation when a debt obligation is not met, that is, the principal or interest payments are not paid when they are due. • In the event of a default, bondholders seldom lose all of their principal value of the bond. Often, a default could result in the suspension of the coupon payment.

  6. Default risk (Credit risk) • Municipal defaults usually follow downswings in business cycles and more likely to occur in high growth areas that borrow heavily. • Credit Risk Ratings: scale is AAA, AA, A, BBB, BB, B, CCC, CC, C, and rating D for bonds in arrears • Five major bond rating agencies are Standard and Poor's, Moody's, Fitch Ratings, Dominion Bond Rating Service and A.M. Best.

  7. Orange county bankruptcy • Robert Lafee Citron:Democratic politician party who was the longtime Treasurer-Tax Collector of Orange County, California, when it declared bankruptcy on December 6, 1994. • 1985: Earned $172 million for the county • 1992: European currency market crisis forced him to sell $400 million in complicated securities. • 1994: Lost $1.6 M, defaulted $1 M in 1995 • Rising interest rates: wrong answer from Robert.

  8. Orange county bankruptcy

  9. Invest in securities yields inversely related to interest rates

  10. Investment Pool How the investment pool Worked

  11. Bankruptcy How did it happen

  12. Summary • Introduction of municipal bonds • Types of municipal bonds • Default risks • Orange county bankruptcy

  13. Reference • http://en.wikipedia.org/wiki/Robert_Citron • http://www.investopedia.com/terms/d/default2.asp • http://www.municipalbonds.com/education/read/77/default-rates-of-municipal-bonds • http://www.investopedia.com/ask/answers/08/orange-county-bankruptcy.asp • http://merage.uci.edu/~jorion/oc/track.gif

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