Definition
Municipal Certificate of Accrual on Treasury Securities (M-CATS) is a type of zero-coupon bond issued by a municipality. Zero-coupon bonds do not pay periodic interest. Instead, they are issued at a discount to their face value and are redeemed at par upon maturity. The difference between the discounted purchase price and the face value represents the interest earned by the investor.
Examples
City Infrastructure Project:
- A city government issues M-CATS to finance a new public transportation system. Investors buy the bonds at a discount, and upon maturity, they receive the full face value, which helps the city fund the project without periodic interest payments.
School District Expansion:
- A school district issues M-CATS to raise funds for building new schools. These bonds are attractive to investors looking for long-term appreciation and municipalities looking to postpone interest payments.
Frequently Asked Questions
What is the primary benefit of M-CATS for municipalities?
The primary benefit for municipalities is the ability to raise funds without having to make periodic interest payments, thus reducing cash flow burdens until the bond matures.
How do investors benefit from M-CATS?
Investors benefit from purchasing the bonds at a discount and receiving the face value at maturity, essentially earning interest over the life of the bond through its price appreciation.
Are M-CATS risk-free?
No investment is entirely risk-free. While M-CATS issued by municipalities generally have lower default risk, they are still subject to the issuer’s creditworthiness and economic conditions influencing municipal revenues.
How are M-CATS taxed?
The interest earned on the difference between the purchase price and the face value at maturity is typically tax-exempt at the federal level and may be exempt from state and local taxes depending on the issuer’s location.
Can M-CATS be sold before maturity?
Yes, M-CATS can be sold in the secondary market before maturity. Their price fluctuates based on interest rates and the credit quality of the issuer.
Related Terms
- Zero-Coupon Bond: A bond that does not pay periodic interest and is issued at a discount to its face value.
- Municipal Bond: A bond issued by a state, municipality, or county to finance its capital expenditures.
- Treasury Securities: Debt instruments issued by the U.S. Department of the Treasury to fund government spending.
Online References to Online Resources
Suggested Books for Further Studies
- “The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau
- “Municipal Bond Markets: Causes and Consequences” by Andrew Ang
Fundamentals of Municipal Certificate of Accrual on Treasury Securities: Finance Basics Quiz
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