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Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income by Triet Nguyen

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Toll Road Bonds

Municipal bonds issued to finance toll roads may be an interesting sector to consider for additional yield. In 1795, the first private paved road was constructed from Lancaster to Philadelphia, Pennsylvania. The Commonweath at the time could not afford construction, so a privately held company built the 62-mile road and charged for passage. This marked the birth of the toll road in the United States. While most roads in the United States are funded by gas taxes, in recent years a series of state budget deficits, lack of additional taxing capacity, and considerable capital expenditures has led to a stalemate in new road construction. Toll roads have once again come to the forefront to provide a steady solution to an aging infrastructure problem required to meet population growth. Toll roads are often constructed by not-for-profit agencies and have therefore increasingly been financed with municipal bonds. As of 2010, over $73 billion in rated municipal bonds have been issued to construct or expand 43 domestic toll roads.2 Investors should be aware of toll road transaction characteristics, key credit risks, and recent economic and financial trends.

Types of Toll Road Projects

There are three basic toll road projects: existing, start-up, and managed lane toll roads. Existing toll roads typically bond for expansion projects or updates to toll collection facilities. Examples include the Pennsylvania Turnpike and New York State Thruway. These projects are mature, have ...

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