alternative minimum tax (amt)

Case Study

Municipal debt issues sometimes contain both AMT and non-AMT bonds. This combination is especially prevalent when public housing authorities issue debt securities. In April 2000 the Georgia Housing and Finance Authority issued $40 million of single-family mortgage bonds with maturities that ranged from June 1, 2001, to December 1, 2031. The AAA-rated issue included approximately $38 million of bonds that paid interest subject to the federal alternative minimum tax. The remainder of the bonds were of the non-AMT variety. AMT bonds are less desirable to own than non-AMT bonds because of the potential tax liability resulting from interest payments received. Because interest on AMT bonds is considered a preference item in calculating the alternative minimum tax, AMT bonds tend to have higher yields compared to non-AMT bonds from the same issue. In the case of the Georgia Housing and Finance Authority issue, AMT bonds maturing on June 1, 2011, provided buyers with a yield of 5.55%, while non-AMT bonds from the same issue maturing on the same date offered a yield of 5.25%. AMT and non-AMT bonds maturing on other dates offered a similar yield difference. The 30-basis point yield advantage of the AMT bonds was a bonus for investors who did not have to worry about paying the alternative minimum tax.