Unit 1-SLGS

Question 1

State and Local Govt. Securities (SLGS)

Answer 1

A pool of investments that a municipality will park funds into for the purpose of prerefunding/escrowing to maturity/defeasing outstanding issues

• SLGS are non-marketable U.S. govt. securities in book entry form only issued to munis as a means by which to support their portfolios and keep them within arbitrage rules
• Issued by the U.S. Treasury Dept.

NOTE: The phrase “escrowed to maturity” applies to those bonds that may still be called. It does not necessarily mean the bonds will make it to maturity

Question 2

Negative Carry

Answer 2

When the interest earned in an escrow account is not enough to cover current debt service
-Issuers are typically ok with negative carry for a short term, if they are able to lock in lower rates over a longer period

Question 3

Positive Carry

Answer 3

When the interest in the escrow account exceeds the amount needed to support refunded bonds
-The risk of positive carry is that it may trigger an arbitrage principle, in which profits must be rebated to the IRS

Question 4

Rebate Amount

Answer 4

Any positive carry amount received by the SLGS that exceeds the interest on the underlying muni must be rebated to the U.S. Bureau of public debt no later than 60 days after the end of every 5th bond year for the duration of the bond issue

NOTE: SLGS and the bonds they defease are considered on equal footing as U.S. Treasury Debt