California Municipal Income Trust, 15
Municipal Bond Basics
A municipal bond is a debt obligation of a state and/or local government entity which is used to help
build America’s infrastructure by raising money to finance public projects such as new hospitals, schools
and improved roads. In return, investors in tax-exempt municipal bonds receive earnings which are free
from federal income taxes and, in some cases, state and local income taxes. Because of their low
correlation to many other fixed-income and equity assets, municipal bonds can also provide
diversification benefits within an investor’s portfolio.
Municipal bonds have historically had a very low overall default rate as compared to corporate bonds.
According to data from Moody’s, the historical default rate of Moody’s-rated municipal bonds is lower
than that of corporate bonds in every rating category. In fact, despite the economic struggles facing
many states and municipalities, investment grade municipal bonds have experienced significantly lower
default rates than even the highest rated corporate bonds.
One reason for the historically lower default rates has been the relatively more stable revenue streams
of municipalities, which have the ability to levy taxes to offset declining revenues. Corporate revenues,
on the other hand, can be more volatile as they have fewer ways to increase revenues during difficult
economic periods. Of course, given the current economic environment, there can be no assurance that
the default rate for municipal bonds will not rise or that volatility will not increase.
Tax-exempt municipal bonds provide investors with significant tax savings. For investors in higher tax
brackets, municipals can offer greater after-tax yields than taxable debt securities of similar maturities
and credit quality, including Treasuries and corporate bonds. Taxable-equivalent yields represent the
amount of pre-tax return an investor would need to earn in a taxable investment in order to equal that
of a tax-exempt investment. The chart to the right illustrates the taxable equivalent yield for California
state residents that file jointly at five different federal income tax levels using a tax-exempt municipal
bond with a 4.00% yield as an example. As you can see, if an investor is in the 22% federal tax bracket,
the 4.00% yield has a taxable equivalent yield of 5.82%. In other words, an investor would need to get a
5.82% yield from a taxable bond to equal the 4.00% payout of the tax-free municipal bond.
- Monthly income which is exempt from federal, California state and/or local
income taxes for California residents.
- Investment grade bonds.
- Interest on the bonds is exempt from the alternative minimum tax.
- Estimated weighted average maturity of approximately 25 to 30 years.
- 3.50% up-front maximum sales charge. In addition to the sales charge, the trust is
subject to annual operating expenses and organization costs.
The objectives of this unit investment trust are to distribute income that is exempt
from federal, California state/and or local income taxes and to preserve capital by
investing in a portfolio of investment grade tax-exempt municipal bonds issued by
California. There is, however, no assurance that the objectives will be achieved.
| Not FDIC Insured Not Bank Guaranteed May Lose Value
You should consider the portfolio's investment objectives, risks, and
charges and expenses carefully before investing. Contact your financial advisor
or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus,
which contains this and other information about the portfolio. Read it carefully
before you invest.
An investment in this unmanaged unit investment trust should be made with an understanding
of the risks associated with an investment in municipal bonds. Municipal bonds are subject to
numerous risks including rising interest rates, economic recession, deterioration of the municipal
bond market, possible downgrades, increased volatility, reduced liquidity and defaults of interest
and/or principal. The portfolio is also subject to additional risks as a result of its concentration in
bonds issued by California municipalities, including a deterioration of the economic factors
affecting the state.
As the use of Internet technology has become more prevalent in the course of business, the trust
has become more susceptible to potential operational risks through breaches in cyber security.
Certain of the securities in the trust are covered by insurance policies obtained by the issuers or
underwriters of the bonds from insurance companies. There can be no assurance that any insurer
will be able to satisfy its commitments in the event claims are made in the future.
This UIT is a buy and hold strategy and investors should consider their ability to hold the trust
The trust may present more risks than a portfolio which is broadly diversified over several regions.
The value of the securities held by the trust may be subject to steep declines or increased volatility
due to changes in performance or perception of the issuers. The markets for credit instruments,
including municipal securities, have experienced periods of extreme illiquidity and volatility.