Ch 5 Flashcards
General Obligation (GO) Bonds
Backed by the full faith, credit, and taxing power of the municipality. Typically requires voter approval
* State GO Bonds backed by income, sales, and excise taxes
* Local GO Bonds backed by ad valorem taxes
* Debt Limit
Capital Appreciation Bonds
Municipal zero-coupon bonds
Revenue Bonds
Backed by a pledge of revenues from an income generating project
* Self-supporting debt - project pays interest and principal from revenue collections
* Example: toll roads, sewer systems, airports etc
No Debt Limit
* Issuance of revenue bonds requires a feasibility study performed by an independent consultant who projects anticipated revenue collections versus the costs of operating the facility and paying for debt service
REVERENUE BONDS HAVE A GREATER RISK OF DEFAULT THAN GO BONDS - so they will typically pay a higher yield
Special Tax Bonds
- Revenue bonds
- Bonds of political subdivisions that are backed by a tax other than ad valorem taxes
- These are typically excise taxes such as alcohol, gas, tobacco taxes
Special Assessment Bonds
Bonds of political subdivisions where a localized improvement is made
* Additional taxes are only levied on those in the improved area
*Ex: sidewalks that only benefit certain residents
Moral Obligation Bonds
A government entity (such as a state) agrees to cover debt service even though there is no legal obligation to do so
* Revenue Bond
* Coupons are higher than GO Bonds
* Requires legislative approval
Double-Barreled Bond
A bond that is backed by both user fees and general taxes
* A revenue bond
* Rated like GO bonds since the taxpayers are ultimately responsible for the debt service
Certificate of Participation (COP)
Allows municipality to issue bonds to build facilities like a university dorm, prison, municipality office building, and then lease these facilities
* Lease payments depend on an annual appropriation from tax collections
* Revenue bond
* The governing body is NOT “legally” obligated to make the annual appropriation, so it is not a GO bond
Lease Rental Bond
Used to finance office construction where the end-user is a state or city agency
* Revenue bond
* less risky than a COP
* The rents paid are the revenue source. Unlike COP, municipality is generally obligated to appropriate the funds for the lease payments from general tax revenues
Industrial Development Bond
Bonds issues to build a facility that will be leased to a corporation
* Revenue bond
* Source of revenue is the corporation’s lease payments
* These bonds are a “non-essential use, private purpose” issue
* INTEREST INCOME IS
FEDERALLY TAXABLE
* Type of Private Activity Bonds (PABs)
Private Activity Bonds (PABs)
Federally taxable munis created to fund private activities
* often tax free at the state and local levels
Short-Term Muni Debt
Categorizes in 2 types
1) For a building/capital project
2) Used to “pull forward” income source and & use money before collected
BANs - Bond Anticipation Notes
1) For a building/capital project
* Used as a “bridge loan” to start a capital project and would be paid off when a long term bond is issued
CLNs - Construction Loan Notes
1) For a building/capital project
* Issued to start the building of multi-family housing projects
* Paid off by the proceeds received from the issuance of a long-term bond issue
* Typically mature in 2-3 years
TANs - Tax Anticipation Notes
2) Used to “pull forward” income source and & use money before collected
* Issuer can borrow against upcoming expected tax receipts with a TAN
* States typically collect income taxes once a year
* Political subdivisions typically collect property taxes twice a year
RANs - Revenue Anticipation Notes
2) Used to “pull forward” income source and & use money before collected
* Issuer can borrow against upcoming revenues expected to be received from the state or from the Fed
* Political subdivisions typically receive payments from the state and from the Fed to support essential services such as public transit
TRANs - TAx & Revenue Anticipation Notes
Combination of the TAN and RAN
GANs - Grant Anticipation Notes
Issues in anticipation of receiving grant monies from the Fed
* for things like pollution control, mass-transit, energy conservation, etc
Tax Exempt Commercial Paper
- Mature in less than 270 days
- Backed by a bank line of credit
VRDN - Variable Rate Demand Notes
Also VRDO - Variable Rate Demand Obligation
* aka Step-Up/Step-Down Notes
Renewable note where the interest rate is reset periodically based on a market index
* At the reset date, holder may renew (not guaranteed) for the next time frame (1 day-1 week), or demand payment
* Limited market, often subject to CONSIDERABLE LIQUIDITY RISK
Muni Debt Trading
- Thin trading market (liquidity risk)
- Traded Over the Counter (OTC)
- Almost all new muni debt issued in book-entry form
US Gov Debt
- Federal Tax - Subject
- State Tax - Exempt
Gov Agency Debt
- Federal Tax - Subject
- State Tax - Exempt
Privatized Gov Agency Debt
- Federal Tax - Subject
- State Tax - Subject
