Chapter 12 Part 8 Flashcards
Municipal bonds arc classified into two major categories
general obligation bonds (GOs) and revenue bonds
General obligation bonds are secured by the
full faith and credit of the issuer, which means the municipality’s ability to collect taxes. Only entities that have the right to impose and collect taxes may issue general obligation bonds
Debt service is the
interest and principal payments due on a bond. Local governments, such as cities and counties, usually rely on property taxes to pay for their expenditures and also to pay the debt service on their bond issues
Property taxes are also known as
ad valorem taxes. These taxes are based on the value of the real estate that the taxpayer owns
States generally do not levy
property taxes. They usually use income, sales, and other taxes to back their bond issues
limited-tax general obligation bonds
Certain governmental units, such as school districts, have a legal limit on the amount of taxes they may impose
revenue bonds are backed by
the fees that people pay to use a specific public facility such as a toll bridge. For example, Lemon County issues revenue bonds to pay for a new irrigation system. The fees paid by the farmers who use the system to irrigate their fields are used to pay the interest on the bonds and to repay their face value when they mature. If the system’s revenues are not enough to service the debt, Lemon County does not have an obligation to make up the difference.
Revenue bonds are commonly used to finance the following types of projects
Airports, Housing, Roads, Bridges, Hospitals, Sewers and water systems, Colleges and universities, Power plants, Sports arenas and convention centers
Industrial development revenue bonds are
a special type of revenue bond. They are issued by a municipality but backed by a private corporation. The money raised from the bond issue is generally used to pay for the construction of a building or plant that the municipality leases to the corporation. Since the municipality does not back the bonds, they are only as good as the corporation behind them
Bonds are long-term
obligations (generally a year or more).
When state and local governments need to raise money on a short-term basis, they issue various types of
notes. Municipal notes generally mature in one year or less
Bond anticipation notes (BANs) are issued to
obtain temporary financing when the municipality expects to issue long-term bonds
Tax anticipation notes (TANs) are used
when the municipality expects to repay the notes through the collection of taxes
Revenue anticipation notes (rANs) are used
when the issuer expects funds from some other source than its own taxes, such as revenue from the state or federal government
Debt with a maturity of more than one year is orten referred to as
as funded debt
Money-market securities are
short-term debt securities (one year or less). There arc a large variety of securities that trade in the 1noney 1narket. Issuers include the lJ.S. government, government agencies, banks, and corporations. There are also a wide variety or participants in the money market including the Federal Reserve Board, banks, securities dealers, and corporations
Money-market transactions provide an avenue for
both acquiring money (borrowing) and investing (lending) excess funds for short periods. Typically, the period ranges from overnight to a few months, but may be as long as one year
Examples of money-market securities and related instruments are
Commercial Paper; Bankers’ Acceptances; Negotiable Certificates of Deposit; Federal Funds; Money-Market Funds; repurchase Agreements (Hepos)
money market instruments are classified as a separate asset class
cash equivalents. Cash equivalents are investments of such high quality and safety that they are considered as good as cash. They are considered a separate asset class from debt instruments because their returns arc relatively uncorrelated with bonds
When corporations need long-term financing, they issue bonds. When they are in need of short-term financing, they issue
commercial paper
