Question: The state sells municipal bonds from time to time. What are municipal bonds in general, and can Hawaii consumers invest in them?
Answer: Municipal bonds are debt instruments of state and local governments and their agencies. Government entities issue bonds to finance projects and operations. Hawaii consumers can invest, and are encouraged to invest, in state of Hawaii bonds. But as with any investment, we recommend individuals do their research and work with a registered financial adviser and/or broker.
Q: How often does the state sell municipal bonds?
A: The state normally plans to go to market twice a year for its general obligation (GO) bonds. However, in 2011 and 2012 the state sold GO bonds only once each year. Other entities of the state will sell bonds when the need for bond proceeds exists.
Q: One recent state bond sale was $867 million in GO bonds in November, and a present offering is for $26 million in home mortgage revenue bonds from the Hawaii Housing Finance and Development Corp. What are some other things the state finances through bond sales?
A: The state will issue bonds, when necessary, for projects in the Department of Transportation, the University of Hawaii and the Department of Hawaiian Home Lands.
Q: How can consumers find out about state bond sales?
A: The most effective way to know when state bond sales are coming up is for people to work with their individual financial advisers and/or brokers. Prior to any sale, the state embarks on an investor campaign aimed at reaching as many individual and institutional investors as possible. For the last sale, the governor released a radio ad encouraging Hawaii residents to invest in Hawaii bonds. We also put out ads in the newspaper announcing any upcoming sales. For individuals who personally keep track of state issuances, the state also maintains an investor relations Web page that has a calendar of upcoming sales. The website can be found on the Department of Budget and Finance’s home page, hawaii.gov/budget; click on the link titled Investor Relations.
Q: How does someone buy the bonds, and is there typically a lot of competition among investors?
A: The state does not sell bonds directly to individual investors. We work through registered brokers in the financial industry. As for competition, we went to market with $867 million in GO bonds last November, and we received over $1.6 billion in orders from retail buyers — mom-and-pop — to institutional holders like insurance companies and banks. Of that amount, over $66 million went to individual retail investors. The state ensures that retail orders are filled before any institutional investors. So at the individual level there really is no competition for bonds.
Q: What is the investment return or range of returns on state bonds?
A: The last GO sale’s ‘all-in’ interest rate was 2.6 percent. This represents the weighted average of interest yields at different levels of the maturity scale. It’s necessary to understand that yields, or interest returns, will differ depending on the duration of the bond. Bonds that mature in one year have a lower interest rate than bonds that mature in 20 years. It’s difficult to determine what the interest rate (on future bond sales) will be because there are many factors that go into its determination all the way to the day of the sale.
Q: Are there tax advantages to buying state municipal bonds?
A: Depending on the sale, interest earnings on municipal bonds may be tax-exempt from both federal and state income tax. The state’s GO bonds are generally tax-exempt, but there are other types or portions of municipal issuances that may be subject to taxes. It depends on what the proceeds of that sale will be used for. All this information is disclosed prior to any sale, and investors need to determine what their individual needs are and make the appropriate decisions when making investment choices.
Q: Is there typically a minimum investment amount required to buy a bond?
A: Each bond carries a par value of $5,000, so individual orders are taken in increments of $5,000. However, there are other financial instruments in the market, such as bond funds where investors could have Hawaii bonds in their portfolio that is part of a bundled fund.
Q: How long are the terms, or maturity dates, on state bonds?
A: The state will issue GO bonds up to 20 years, and revenue bonds issued by DOT, UH and HHFDC are generally issued for 30-year terms.
Q: Is there risk, and where can prospective buyers go to research that?
A: Any investment carries with it a degree of risk, and we recommend prospective buyers do all their research before attempting to make any type of investment. We recommend investors work with a registered financial adviser/broker to determine what types of investments and the associated tax implications are appropriate for their financial needs.
