ABSTRACT
This chapter examines the specific mechanic of issuing municipal bonds. People can easily apply the mechanics of municipal bonds to Treasury securities issued by the federal government as well. According to Keynesian macroeconomic theories, debt-financed governmental expenditures are supposed to stimulate the national economy. State and local governments are more likely to borrow monies by issuing municipal bonds to finance various capital projects when general fund tax revenues are not sufficient for launching projects. Borrowers borrow monies by issuing bonds. When public entities issue bonds, the interest is often exempt from federal and state income taxes. Internal Revenue Service (IRS) code allows tax-exempt status to bonds issued by states, counties, cities, and school districts. There are two methods of computing borrowing costs for stepped coupon serial bonds: net interest cost (NIC) and true interest cost (TIC). Credit rating agencies assess the capacity of bond issuers to make all coupon and principal payments to investors.
