Navigating Today s Municipal Securities Market

Transcription

1 product resource april 2011 Navigating Today s Municipal Securities Market municipal bonds Municipal Bonds A Variety of Approaches in brief Characteristics of Municipal Bond Investing 2 Types of Municipal Bonds 4 For generations, municipal bonds have been an important part of investment portfolios because of their relatively low credit risk and the tax-exempt income 1 they generate. Access to this important segment of the fixed income market is available through a variety of investment choices individual securities, mutual funds, unit investment trusts and exchange-traded funds and at an investment entry point as low as $1,000. This brochure is designed to give you an overview of the municipal market investment choices available to you. After you review them, contact your Morgan Stanley Smith Barney Financial Advisor to discuss whether municipal bonds are suitable for you, and if so, which investment might best meet your needs. 1 Interest on municipal bonds is generally exempt from federal income tax. However, some bonds may be subject to the Alternative Minimum Tax (AMT). Typically, state tax-exemption applies if securities are issued within one s state of residence, and local taxexemption typically applies if securities are issued within one s city of residence. Municipal Bond Investment Choices 5 Direct Ownership 5 Indirect Ownership 6 Choosing Between Direct and Indirect Investment Options 7 Comparison of Different Investment Choices 8 Investment Considerations 10 Glossary of Terms 11 This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This communication has not been prepared for any particular client or group of clients and is not an assessment of whether a specific investment or investment strategy is appropriate for any such client(s). This is not a research report and has not been prepared by the research departments of Morgan Stanley & Co. Incorporated or Citigroup Global Markets Inc. It was prepared by Morgan Stanley Smith Barney sales, trading or other non-research personnel. Past performance is not necessarily a guide to future performance. Please see additional important information and qualifications at the end of this material.

2 product resource / navigating today's municipal securities market Characteristics of Municipal Bond Investing unicipal bonds are debt obligations issued by cities, counties, M states and other governmental entities to finance projects that are considered by the municipality to be beneficial to the public good: housing, schools, highways, hospitals, sewer systems and other infrastructure. Tax Considerations. Interest income on municipal bonds is generally exempt from federal income tax, and if you purchase a municipal bond issued in your state of residence, you generally don t have to pay state income tax (if there is one) on interest income. In some instances, you may even be exempt from paying local taxes on the interest (known as triple tax-free). Note, however, that these tax exemptions do not apply to capital gains resulting from selling a security for a profit in the secondary market, or to certain distributions for indirect investments. Prior to purchasing a municipal security, make sure you fully understand your own tax situation, the state and local tax treatment of income distributions related to the security and whether the security is subject to the AMT. Please note, tax-exempt municipal bonds may not be appropriate for tax sheltered accounts, such as an individual retirement account (IRA). 2 Bond Credit Ratings. Credit ratings are a common benchmark used to assess the ability of an issuer to make timely payments of interest and principal, and three rating agencies Moody s Investors Service, Standard & Poor s (S&P) and Fitch Ratings assess the debt of municipal issuers. The rating agencies classify bonds broadly as either investment grade or below investment grade, and within each category, use subclassifications to provide further clarity about a security s credit risk. Investment grade bonds may be appropriate for more conservative investors, as they have been evaluated and determined to have high credit quality. But not all investment grade debt is created equal. There are lower rated securities within the category, indicating that they are less likely to meet their obligations than those with the highest ratings. Below investment grade bonds (also known as high yield bonds) may be suitable only for more aggressive investors willing to accept greater degrees of credit risk. High yield bonds are considered speculative, involve a greater risk of default than their investment grade counterparts and tend to be more volatile. As a result, the yields on these bonds are typically higher to compensate investors for the additional risk. Some municipal bonds are issued with bond insurance 3 which guarantees the timely payment of interest and principal, should the issuer default. Insured bonds may be assigned the higher of either the issuer s or the insurer s credit rating. Therefore, for municipal issuers with credit ratings lower than the insurer s, the insurance provides a higher credit rating than would otherwise be assigned to the bond issue. Before investing, you should review the bond s credit rating including the issuer s (and insurer s, as applicable) and assess the effect of a rating change on your investment. Investors should not rely solely on ratings, as they do not predict investment performance and are only one of several factors to consider when evaluating an investment. Maturity choices. Municipal bonds provide a wide range of maturities from a few weeks to 30 years or more allowing you to choose securities that are consistent with the timeframes associated with your specific investment goals. determining suitability. When considering whether a municipal bond investment is suitable for you, you should: Confirm your tax situation and whether or not you are subject to the Alternative Minimum Tax (AMT) Consider the type of account in which 2 morgan stanley smith barney 2011

3 you will hold the securities, for example taxable or tax-exempt Know your risk tolerance and income needs Understand the type of bond (e.g., general obligation, revenue, non-traditional municipal bonds) and its material terms, features and risks, such as issuer and any other obligated entities; frequency, timing and source of interest payments; the term to maturity and whether the bond is callable or if there are circumstances in which the bond could be redeemed for less than the full principal amount Examine the issuer s and the security's credit rating and determine if the particular bond is insured Research any other publicly available material information relating to the investment, including material event notices and other disclosures filed by the issuer on the Municipal Securities Rulemaking Board s public information disclosure website, EMMA 2 The tax advantage of municipal bonds is eliminated if they are held in tax-sheltered accounts, such as a regular IRA, Simplified Employee Pension (SEP) or Qualified Plan, since (a) funds withdrawn from a tax sheltered account are taxed at distribution, without regard to whether the interest/ principal originally came from a tax-exempt source, and (b) all qualified distributions out of Roth IRAs are tax-free, again regardless of origin. Speak to your Tax Advisor for further information. 3 Insurance does not pertain to market values, which will fluctuate over the life of the bonds; it covers only the timely payment of interest and principal. Comparison of Benefits Individual Municipal Bonds Municipal Bond Mutual Funds Municipal Bond UITs Municipal Bond ETFs Fixed Income Principal at Maturity Diversification for all Portfolio Sizes Control of Capital Gains Control of Alternative Minimum Tax Exposure Low Minimum Investment morgan stanley smith barney

4 product resource / navigating today's municipal securities market Types of Municipal Bonds he two major types of municipal T bonds are General Obligation bonds and Revenue bonds. General Obligation bonds. General Obligation Bonds, or GOs, are debt securities issued by state and local governments to finance public works projects, such as schools, municipal buildings and public parks. GOs are backed by the issuer s full faith and credit and are considered to have less credit risk than other types of a municipality s debt because its full resources (i.e., taxing ability) are committed to repaying bondholders. As a result, GO bonds generally pay a lower interest rate than revenue bonds of comparable quality and duration. Revenue bonds. Revenue Bonds are used to fund the construction or expansion of revenue generating projects, such as electric power plants, wastewater treatment facilities or airports. Principal and interest is repaid solely from revenue generated by the funded project, and revenue bonds generally carry a greater credit risk than GO debt, due to the possibility that cash flow may be insufficient to meet the obligations. Some of the different variations of municipal bonds include: Pre-refunded bonds. Pre-refunded bonds are issued when municipalities refinance outstanding debt that was previously issued at a higher interest rate. Once the refunding is complete, the issuer uses the proceeds of the new issue to purchase U.S. government securities, which are then placed in an escrow account. The proceeds from the escrow account are used to pay interest and principal on the original debt until the issue is called. Zero-coupon bonds. Zero-coupon bonds are sold at a discount to their face value and do not make periodic interest payments. Interest compounds semiannually at a stated rate (yield) and is paid in full at maturity. Taxable municipal bonds. Taxable municipal bonds are issued on a taxable basis because the intended use of the proceeds does not meet federal tax law requirements for exclusion from gross income, or because certain other federal tax law requirements are not met. Build America Bonds (BABs) provided state and local governments with low-cost debt for necessary capital projects. The BABs program financed public works projects, such as municipal, state and school building construction; water and sewer improvements; and transportation infrastructure upgrades. The program was discontinued by Congress at the end of 2010, but BABs are available in the secondary market. Lease Revenue bonds. Lease Revenue bonds are securities in which lease payments on a municipal facility provide the revenue backing the bond. For example, a municipality may lease a facility to a school district, and all or a portion of the lease payments are passed through to the lease revenue bondholder. Certificates of Participation. Certificates of Participation (COP) are issued to finance the acquisition of municipal property and equipment. A COP is a share of the lease revenues of a project, and holders are entitled to a portion of the lease payments, based on the number of COPs owned. COPs are structured so that a city, county or school district may lease a facility from a created authority. At the end of the lease term, the user takes ownership of the facility. Private activity or AMT bonds. Private activity or AMT bonds are non-traditional municipal securities from which 10% or more of the proceeds are used by private entities for qualified purposes (for example, certain housing, student loans, industrial development, solid waste disposal and transportation projects). Although usually exempt from federal income taxes for personal tax returns, they are considered preference items and must be included for calculations of the AMT. If you are subject to the AMT, you will pay income tax on AMT bond interest income. Non-traditional municipal bonds. Non-traditional municipal bonds are securities that are not generally backed by either a tax levy or by revenue generated by a public enterprise, and in some instances, don t carry a 4 morgan stanley smith barney 2011

5 repayment obligation of the issuer. Examples include tobacco asset-backed bonds, gas and electric prepayment bonds, private activity bonds, housing and student housing bonds, student loan bonds, hospital and healthcare bonds and land secured bonds. You should be aware that these securities are more complex and carry greater risks than traditional municipal securities. These risks include the possibility of loss of interest payments and even principal. As such, they are only suitable for aggressive investors willing to accept greater degrees of credit risk. Be sure you understand all of the material terms and features of any municipal security before you invest. Municipal Bond Investment Choices f you believe that municipal securities are an appropriate investment I for you, there are several ways to gain access to this segment of the bond market, and they fall into two categories, direct and indirect ownership. With direct ownership, you buy and own individual municipal bonds. With indirect ownership, you buy shares in a mutual fund, a unit investment trust (UIT) or an exchange-traded fund (ETF) that owns municipal bonds. Any of these investment choices can be held in either a brokerage account or in certain types of investment advisory accounts. In a brokerage account, you with assistance from your Financial Advisor make the investment decisions, and you are charged a markup or commission on most investment transactions in the account. In an advisory account, your Financial Advisor provides investment advice on your portfolio, and transaction costs are covered as part of a quarterly fee based on the total value of your account. Depending on the type of advisory program in which you invest, either your Financial Advisor or other investment professionals may have discretion to make investment decisions on your behalf. Direct Ownership municipal bonds. The municipal bond market is one of the most varied fixed income segments, offering a range of issues diversified by geography, maturity, sector and structure. They can usually be purchased in $5,000 denominations as new issues or in the secondary market. An individual municipal bond will typically pay a fixed amount of interest income semiannually through maturity, which can range from a few weeks to 30 years or more. Investors can own individual municipal bonds directly in either a brokerage account or in certain types of advisory accounts. Municipal Bond Benefits. Principal repaid at maturity or when bond is called Fixed interest is paid semiannually (except zero-coupon bonds) Easily integrated into portfolios with state-specific guidelines or restrictions against specific industries or sectors Control the timing of capital gains and losses to address tax liabilities Tailor your holdings so that interest payments and final maturity corresponds with specific goals No ongoing advisory fee in a brokerage account, although the price of your bond may include a markup, and you may pay a transaction fee morgan stanley smith barney

6 product resource / navigating today's municipal securities market Professional investment advice and other services within an advisory account Municipal Bond Considerations. Liquidity varies among issues and by transaction size; some bonds may not trade quickly or easily, and may be sold at a loss Total return will be reduced by the quarterly advisory fee in an advisory account and (if applicable) any other investment manager fees; not applicable to bonds held in a brokerage account Smaller portfolios may be unable to achieve an adequate level of diversification Greater concentration in individual issues will increase the impact of a loss, should a default occur Investors are subject to reinvestment risk when bonds mature or are called Changes in interest rates will cause bond prices and valuations to fluctuate Bonds are subject to default risk Indirect Ownership Municipal Bond Mutual Funds. A mutual fund is an investment company that pools money from many investors and invests in stocks, bonds, short-term money market instruments or other securities. There are two types of mutual fund structures, open-end and closedend. 4 Here we focus on open-end funds, which are sold by prospectus, are actively managed by a fund manager and typically have a $1,000 investment minimum. A municipal bond mutual fund can be owned independently, within a brokerage account or in most types of advisory accounts. Municipal Bond Mutual Fund Benefits. Immediate diversification by purpose, geography, maturity and/or sector, which may reduce the risk of losses due to defaults Pays monthly dividends Professional investment management Relatively low minimum investment Daily redemptions at net asset value (NAV) Reinvestment of proceeds from bond sales, called bonds or return of principal Municipal Bond Mutual Fund Considerations. Monthly dividends can vary due to portfolio manager s buy and sell decisions to meet fund liquidity requirements No control over timing of capital gains distributions, which may be taxable Fund guidelines may allow for investment in riskier segments, and an investor will have no input in the decision NAV may decline if portfolio manager is forced to sell in a declining market, and will rise and fall with changes in interest rates Management fees and fund operating costs will reduce a fund s total return, as will fees incurred if owned in an advisory account A decline in NAV cannot always be recovered because mutual funds never mature and do not have a par or face value Unit Investment Trusts (UITs). UITs are fixed portfolios of securities that may include stocks, bonds and alternative investments, and the unitholders own a portion of every security in the trust. They are available with a wide range of objectives and risk levels and typically have a $1,000 minimum investment. Fixed income UITs have a par value and mature as individual bonds are redeemed or called. UITs can be owned within a brokerage account or in certain types of advisory accounts. UIT Benefits. Immediate diversification, which may reduce the risk of losses due to defaults Fixed portfolio of securities for the life of the trust (or until bonds are called or mature), which enhances transparency Relatively low minimum investment, generally $1,000 Daily redemption at NAV Generates monthly income paid throughout life of the trust UIT Considerations. Investors are subject to reinvestment risk when bonds mature or are called Par value declines when bonds within a UIT are called or mature Passively managed portfolio; holdings can be sold only in certain, limited circumstances NAV will rise or fall with changes in interest rates Exchanged-Traded Funds (ETFs). ETFs are open-end investment companies that own a diversified basket of securities, trade like stocks on the major exchanges and are designed to track the performance of a specific benchmark. Most municipal bond ETFs seek to match the performance of a national municipal bond index, although there are a few BABs-only and single-state funds (largely California and New York). ETFs can be owned within a brokerage account or within most types of advisory accounts. ETF Benefits. Immediate diversification, which may reduce the risk of losses due to defaults Relatively low minimum investment Passive ETFs may have lower expense ratios and be more efficient relative to mutual funds Shares trade on major exchanges 6 morgan stanley smith barney 2011

7 Generates monthly income NAV and defined portfolio holdings available throughout the day, enhancing transparency ETF Considerations. Shares trade on an exchange and investors sell at prevailing market price, which may be more or less than the current NAV and the original investment Typically has lower yields than competing structures because of the concentration of higher quality bonds Fund guidelines may allow for investment in riskier segments, and an investor will have no input in the decision Fund returns are subject to tracking error, due to reliance on optimization to track selected benchmark NAV and market prices will fluctuate with changes in interest rates A decline in NAV cannot always be recovered because ETFs never mature and do not have a par or face value Please see the chart on page 8 for a comparison of the features, benefits and risks of the various direct and indirect investment choices. 4 Closed-end fund shares are listed on a stock exchange or are traded in the overthe-counter market. Like other publicly traded securities, the market price of closed-end fund shares fluctuates and is determined by supply and demand in the marketplace. Choosing Between Direct and Indirect Municipal Bond Investment Options Y our financial goals are the prime consideration when deciding whether to invest in municipal bonds and choosing between direct or indirect municipal bond investment options. Several factors may be involved in that decision, for example, individual bonds may not suit investors whose accounts are not large enough to construct a diversified portfolio. As a result, an indirect solution may be a better choice. Similarly, indirect ownership offers investors who don't have a pressing need for regular income the opportunity to take advantage of the dividend reinvestment feature offered by most indirect investment options. On the other hand, holding individual bonds may allow investors to tailor their interest and maturity payments to match their specific cash-flow needs. Individual bonds also give investors the flexibility to implement their own specific investment preferences regarding geography, credit quality or other factors. These are just a few examples of the many considerations that may influence your investment decision. Municipal securities may have a place in your investment strategy if your objectives include: Supplementing existing sources of income Reducing income tax liability Diversifying portfolio risk without a meaningful sacrifice of after-tax yield Funding goals or expenses Whatever your preference, make sure that your investment decision is in line with your risk tolerance, maturity and tax objectives. Your Morgan Stanley Smith Barney Financial Advisor can assist you in determining whether municipal bonds are a suitable investment for you, and in structuring a portfolio that is best suited to your investment goals and risk tolerances. For more information about municipal bonds, municipal bond mutual funds, UITs, ETFs or any other investment product or service, please contact your Financial Advisor. morgan stanley smith barney

8 product resource / navigating today's municipal securities market Comparison of Different Municipal Bond Investment Choices Individual Municipal Bonds Return of Principal Principal returned at maturity or when bond is called; 5 secondary market sales are subject to prevailing conditions and may result in a loss of principal Municipal Bond Mutual Funds Principal at risk; NAV of shares fluctuates, and declines in NAV are not always recoverable Maturity Date Set maturity date None Income Payments Interest is usually fixed and paid semiannually (except zero-coupon bonds) Fluctuating, monthly dividend payments Liquidity Trade on secondary market at, above or below their face value, depending on market conditions; some bonds may be illiquid Bought and sold at NAV Redeemable Redeemed only at maturity or when called; proceeds from a sale prior to maturity are subject to prevailing market conditions and may result in a loss of principal Redeemed by selling shares at prevailing NAV; may result in loss of principal Default Risk Varies by number of positions and portfolio credit quality. Diversification may reduce the risk of losses due to defaults Mitigated by diversification, which may reduce the risk of losses due to defaults Interest Rate Risk Exists but declines as bonds near maturity Exists and sensitivity to interest rates depends on portfolio holdings Expenses No ongoing expenses, although the price of your bond may include a markup, and you may pay a transaction fee If owned within an advisory account, the quarterly assetbased fee includes transaction costs, investment advice and other services Management fees; may have front- or back-end sales charge if purchased individually or in a brokerage account If owned within an advisory account, sales charges are waived Interest/Dividend Reinvestment Option No automatic reinvestment option; investor responsible for investment decision If owned within certain advisory accounts, reinvestment is at the Financial Advisor s or investment manager s discretion Automatic reinvestment option Professionally Managed No professional management in a brokerage account Depending on the advisory program, Financial Advisor and/ or other investment professionals provide ongoing investment advice and portfolio management Actively managed (except index funds) Capital Gains Distributions Ability to manage the timing of capital gains and losses to address tax liabilities Investor does not control timing of capital gains distributions, which may be taxable Diversification Will need to purchase multiple issues in a brokerage account to diversify Degree of diversification may be at discretion of Financial Advisor or other investment professional Constantly changing portfolio of bonds Source: Financial Industry Regulatory Authority; Morgan Stanley Smith Barney. 5 Subject to credit risk of the issuer. 8 morgan stanley smith barney 2011

9 Municipal Bond UITs Receive principal back as bonds in UIT mature or are called 5 Municipal Bond ETFs Principal at risk; NAV of shares fluctuates, and declines in NAV are not always recoverable Trust matures as bonds in the portfolio are redeemed or are called None Fixed monthly, quarterly, or semiannual payments Fluctuating, monthly dividend payments Bought and sold at NAV Trade on an exchange with intraday fluctuation in the share price Redeemed by selling shares at NAV; may result in loss of principal Redeemed by selling shares at prevailing market price on exchange; may result in loss of principal Mitigated by diversification, which may reduce the risk of losses due to defaults Diversified by purpose, geography, maturity and/or sector, may reduce the risk of losses due to defaults Exists but declines as bonds near maturity Exists and sensitivity to interest rates depends on portfolio holdings Management fees (usually lower than mutual fund fees) and front-end sales charge If owned within an advisory account, sales charges are waived Management fees (usually lower than mutual fund fees) and broker commissions If owned within an advisory account, the quarterly asset-based fee includes transaction costs, investment advice and other services May reinvest into a tax-free money market instrument or payout to client Automatic reinvestment option available for most but not all ETFs Passively managed Most are passively managed; some are now actively managed Tax efficient, attributable to passive management Tax efficient, attributable to passive management (if applicable) Fixed portfolio of bonds; less diversified than many bond mutual funds, closed-end funds or ETFs Constantly changing portfolio of bonds morgan stanley smith barney

10 product resource / navigating today's municipal securities market Investment Considerations Individual Municipal Bonds. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond s maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/ or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio. Build America Bonds (BABs) are backed by the credit quality of the issuer, and not the federal government. BABs are structured as direct payment bonds, in which a direct federal subsidy is paid to the state or local government issuer. Please read the relevant offering document. There is no assurance that the issuer of any individual bond will make payments of interest or principal as scheduled. Mutual Funds. Bond mutual funds are generally subject to interest rate, credit, liquidity and market risks to varying degrees. These risks are more fully described in the fund s prospectus. Mutual funds charge investment management fees and ongoing expenses for operating the fund that you will pay as long as you are invested. UITs. A unit trust s value will fluctuate with the portfolio of underlying securities and may be worth more or less than the original purchase price at the time of redemption. There is no guarantee that the objective of the portfolio will be achieved. Additionally, the trust may terminate earlier than the specific termination date as stated in the prospectus. Consult your tax advisor for possible tax consequences associated with this investment. An investment in an unmanaged unit investment trust should be made with an understanding that the trust may be concentrated in bonds of a particular type of issuer. This makes the trust less diversified and subject to greater risk than a more diversified portfolio. Additionally, the financial condition of an issuer may worsen or its credit rating may drop, resulting in a reduction in the value of your units. This may occur at any point in time, including during the primary offering period. ETFs. An investment in an exchangetraded fund involves those risks described above that are applicable to bond mutual funds. In addition, because these funds are typically exchange-traded equity securities, they are also subject to market fluctuations caused by such factors as economic and political developments; news relating to specific issuers and municipal bonds generally; changes in interest rates; and perceived or actual trends in municipal bond prices. In addition to secondary market sales, ETFs are redeemable only in creation unit size through an authorized participant and are not individually redeemable from an ETF. There is no assurance any mutual fund, UIT or ETF will achieve its investment objective. An investment in a mutual fund, UIT or ETF is subject to market risk, which is the possibility that the market values of securities owned by the fund will decline and that the value of the fund may therefore be less than what you paid for shares of the fund. 10 morgan stanley smith barney 2011

11 Accordingly, your investments can be worth less than their original cost. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. Mutual funds, UITs and ETFs ( a fund ) are sold by prospectus, and new issue/primary market municipal bonds are sold by official statement. Please consider the investment objectives, risks, charges and expenses of a fund, and all of the material terms of municipal bond, carefully before investing. The prospectus or official statement contains this and other information and can be obtained by contacting your Financial Advisor. Please read the prospectus or official statement carefully before you invest. Morgan Stanley Smith Barney, its affiliates and Financial Advisors do not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. You should always consult your own legal or tax advisor for information concerning your individual situation. Glossary of Terms alternative minimum tax (amt) A federal tax aimed at ensuring that certain individuals, trusts, estates and corporations pay a minimum amount of income tax. It is a separately figured tax that eliminates many deductions and credits used in computing the regular federal income tax, thus increasing AMT taxable income. The AMT has its own exemption amount and tax rates. Please consult with your tax advisor before making any investment decision regarding this form of tax. callable bond A bond which may be redeemed by the issuer on specified dates prior to maturity. concentration risk The risk that results from a lack of diversification. credit rating A rating assigned by a recognized credit rating agency, such as Moody s, Standard & Poor s or Fitch Ratings, that reflects a municipality s or corporation s ability to repay its obligations (creditworthiness), as well as the issued security s credit quality. liquidity The ability to convert assets into cash or cash equivalents quickly. maturity date The stated date on which the principal amount of a bond is due and payable. net asset vale (nav) The net assets of a mutual fund or a UIT divided by the total number of outstanding shares. par value A dollar amount that is assigned to a security when representing the value contributed for each bond or share in cash. tax preference A type of income, normally tax-free, that may trigger AMT for taxpayers. Tax preference items include private activity municipal bond interest, and it is added to the amount of AMT income in the tax formula. morgan stanley smith barney

12 product resource / navigating today's municipal securities market Important Information and Qualifications This material was prepared by sales, trading or other non-research personnel of Morgan Stanley Smith Barney LLC (together with its affiliates, hereinafter Morgan Stanley Smith Barney ). Morgan Stanley Smith Barney was formed pursuant to a Joint Venture between Citigroup Inc. and Morgan Stanley & Co. Incorporated (herein Morgan Stanley ). This material was not produced by a Morgan Stanley research analyst or a Citigroup Global Markets Inc. or any of its affiliates (herein Citigroup ) research analyst, although it may refer to a Morgan Stanley or Citigroup research analyst or research report. Unless otherwise indicated, these views (if any) are the author s (if any author is noted) and may differ from those of the Morgan Stanley or Citigroup fixed income or equity research departments or others in the firms. This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Smith Barney is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended ( ERISA ) or under section 4975 of the Internal Revenue Code of 1986 as amended ( Code ) in providing this material. This material was prepared by or in conjunction with Morgan Stanley Smith Barney trading desks that may deal as principal in or own or act as market maker or liquidity provider for the securities/instruments (or related derivatives) mentioned herein and may trade them in ways different from those discussed in this material. The trading desk may have accumulated a position in the subject securities/instruments based on the information contained herein. Trading desk materials are not independent of the proprietary interests of Morgan Stanley Smith Barney, which may conflict with your interests. Morgan Stanley Smith Barney may also perform or seek to perform investment banking services for the issuers of the securities and instruments mentioned herein. The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors. Morgan Stanley Smith Barney is involved in many businesses that may relate to companies, securities or instruments mentioned in this material. These businesses include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/ instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Morgan Stanley Smith Barney has no obligation to provide updated information on the securities/instruments mentioned herein. Certain securities referred to in this material may not have been registered under the U.S. Securities Act of 1933, as amended, and, if not, may not be offered or sold absent an exemption therefrom. Recipients are required to comply with any legal or contractual restrictions on their purchase, holding, sale, exercise of rights or performance of obligations under any securities/instruments transaction. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances and objectives. This material does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Prior to entering into any proposed transaction, recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Smith Barney does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. Some of the information contained in this document may be aggregated data of transactions in securities or other financial instruments executed by Morgan Stanley Smith Barney that has been compiled so as not to identify the underlying transactions of any particular customer. The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. Morgan Stanley Smith Barney does not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. You should always consult your own legal or tax advisor for information concerning your individual situation. This material may not be sold or redistributed without the prior written consent of Morgan Stanley Smith Barney. This material is not for distribution outside the United States of America. Morgan Stanley Smith Barney LLC is a registered broker-dealer, not a bank. Unless otherwise specifically disclosed to you in writing, investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC, are not insured by the FDIC, are not deposits or other obligations of, or guaranteed by, banks and involve investment risks, including possible loss of principal amount invested Morgan Stanley Smith Barney LLC. Member SIPC. CLF43203 CMS GP P-N12/ /11