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Additional Bonds Test
Additional Bonds Test
The conditions under which an issuer is permitted, pursuant to the terms of the resolution or indenture, to issue additional bonds on parity with an outstanding obligation. For example, an issuer may be permitted to issue additional bonds when pledged revenues are sufficient to cover existing and projected debt service by some specified multiple (e.g. 1.25).
- In the municipal market, arbitrage refers to the difference between the tax-exempt interest rate paid by the borrower and the interest rate at which the proceeds of the issue are invested. The Internal Revenue Code contains specific regulations concerning the amount that can be
- earned from the investment of tax-exempt proceeds.
Obligations issued by governments that do not expect to sell in excess of $10 million of “qualified tax-exempt obligations” in a calendar year. The issuer must designate its securities as “qualified tax-exempt obligations” at the time of issuance, and the securities may not be private-activity bonds. The designation of bonds as qualified tax-exempt obligations is an exception to the general rule of Section 265(b)(1).
An expression of interest equal to one-hundredth of a percent (0.01%)
1 b.p. = .01%
400 basis points is 4%
Bonds that do not identify the owner. Possession is considered to be ownership. Current federal law requires that all debt obligations with a maturity greater than one year be issued in registered form; these are known as registered bonds.
A financing structure used to pool a number of distinct borrowings to take advantage of reduced issuance costs and a common reserve. In many cases, bond banks are administered by large jurisdictions (often states) and the issuer covenants to create and/or make up a deficiency in a reserve fund available to program participants.
A legal document that spells out the specific terms and conditions under which bonds may be issued. The indenture is used when a trustee is involved in a financing and forms the basis of the trustee’s responsibilities to bondholders (also called the “trust indenture”).
Bond Purchase Agreement (BPA)
The agreement signed by the issuer and the underwriter(s) spelling out the price to be paid for the bonds and the interest rates that the bonds are to bear. The bond purchase agreement also details any opinions or certifications to be delivered on the date of closing (delivery).
Bond Resolution or Bond Ordinance
The act of the governing body that authorizes the issuance of bonds (sometimes called an “Authorizing Resolution or Ordinance”).
- State statutes generally govern the procedures that need to be followed by the governing body to permit issuance of debt.
- Bond Ordinance = More formal term
Bond Year Dollars
Bond-year dollars are calculated by adding the results of the amount of bonds outstanding times the number of years they are outstanding.
Used in calculating NIC
The price an issuer will pay to investors to redeem its obligations prior to their stated maturity date.
The call premium is expressed as a percent of the par value.
Call or Call Provision
The conditions under which a debt obligation may be redeemed prior to its stated maturity. Such provisions specify the date on which an obligation may be redeemed and the price investors will receive if their bonds are redeemed.
Such provisions typically take one of the following forms: Mandatory, optional or extraordinary redemption provisions.
A spending plan for capital outlays for the current or upcoming fiscal year.
The capital budget is usually the first year of a multi-year capital improvement plan.
Coupon Interest Rate
The rate of interest paid on a specific bond.
The coupon interest rate appears on the face of the bond or, in the case of book-entry only bonds, on the bond record maintained by the securities depository.
The date on which the issuer legally issues its debt or other obligation.
On that date, the purchaser provides the funds to the issuer and the issuer delivers the securities to the purchaser.
At closing, bond counsel will provide the approving legal opinion.
Certificate of Participation
A security that represents a share of an issuer’s lease payment.
- When a municipality finances a public facility through a lease-purchase transaction, the interest in that government’s lease payment often is assigned to a third party that issues
- certificates of participation.
The certificates represent a share of the lease payment to be received by the investor.
A guarantee by a third party in a debt financing that strengthens the credit quality behind the obligation.
The provision for payment of an outstanding obligation with cash or securities that are placed in escrow until the due date.
A pledge by the issuer, in the trust indenture or bond resolution, to maintain a specified level of coverage of debt service requirements from pledged revenues.
The date on which a debt obligation begins to accrue interest.
For example, if a bond issue was dated July 1 and was delivered to the purchaser (closed) on July 14, the purchaser would need to pay the issuer accrued interest from the dated date (July 1) up to but not including the delivery date (July 14).
The face value, or par amount, of a bond that is due at maturity.
Most municipal bonds are issued in denominations of $5,000 or integral multiples thereof.
The date on which debt obligations are delivered to the purchaser. This is also known as the closing date.
A bond that has two pledged sources of security. Most often a double-barrel bond is a general obligation that is initially secured by some specified revenue stream.
A term used to describe a wide range of financial products derived from more conventional securities or debt service cash flows. Often contractual arrangements, derivative products include interest rate swaps, inverse floaters and other hybrids.
General Obligation (GO) Bonds
Are bonds that are secured by the issuer’s full-faith–and-credit pledge.
Most GO bonds are backed by the issuer’s ability to level an ad valorem tax in an amount sufficient to meet debt service requirements.
Some GO bonds, known as limited-tax GO bonds, are backed by the pledge of a defined portion of the issuer’s general taxing power.
Bond Section 501(c)(3) of the Internal Revenue Code refers to organizations that are traditional charitable organizations, including but not limited to those organized for religious, scientific, literary, or educational purposes.
An agreement in which one party provides a facility or equipment in exchange for a pledge from the other to make regular lease payments. Upon completion of the lease term, the lessee assumes ownership of the item. Most lease-purchase agreements provide that the leasee will continue to make lease payments only as long as its governing body appropriates funds for that purpose.
No council vote required.
The repayment schedule for a bond or other obligation that is set out in the legal documents at the time of issue.
Level Debt Service Maturity Schedule
A debt repayment structure that is characterized by lower principal maturity amounts in the early years which gradually increase. When these principal repayment requirements are combined with interest payments, the result is a level debt service payment, like a home mortgage
An opinion concerning the legality of a municipal bond issue. Such opinions usually address the legal authority of the issuer to sell bonds, the issuer’s compliance w ith all procedural requirements prior to issuance, and the tax status of the bonds as an investment. To ensure the marketability of their offerings, govt’s usually retain services of firms that specialize in municipal bond issues.
The amount of an issue’s principal, or par value, that is scheduled to be redeemed on a given date.
Level Principal Maturity Schedule
A debt repayment structure that provides for equal principal payments in each year. When combined with interest requirements, this structure results in a debt service schedule that is higher in the early years.
Municipal Securities Rulemaking Board (MSRB)
Created in 1975 as a product of amendments to the Securities Exchange Act of 1934, the MSRB is an independent, self-regulatory organization.
The 15-member MSRB is charged with providing regulatory oversight of dealers, dealer banks, and brokers in the municipal securities industry.
The date on which a given security is scheduled for redemption.
Net Interest Cost (NIC)
- A method used to calculate the overall interest cost of a borrowing. The NIC is calculated by dividing total interest
- payments over the life of the issue by total bond year dollars. Total bond year dollars is the sum of the products of the amount of bonds outstanding and the number of years they are outstanding.
Discount: Add to total interest
- Subtract from total interest
Nationally Recognized Bond Counsel
Firms that have experience providing legal opinions related to the issuance of municipal bond issues. The market generally considers firms listed in The Bond Buyer’s Municipal Marketplace to be nationally recognized.
The face or maturity value of a security.
A disclosure document prepared in connection with a specific offering which provides detailed information concerning security.
The sum of future payments due discounted back to the present date at an assumed rate of interest.
Preliminary Official Statement (POS)
A disclosure document prepared in connection with a specific offering that provides detailed information concerning security provisions, maturity dates and amounts, optional redemption provisions, and other relevant credit data.
The POS is prepared and circulated as a marketing tool prior to sale of securities.
Revolving Loan Fund
A centrally administered (usually by a state) fund that makes loads to subordinate units of government to address specific funding objectives. Loan repayments are recycled into additional loans, grants and state monies.
- Wastewater treatment funds created pursuant to Water Quality Act of 1987.
A term used to describe the underwriting, sale, or placement of securities at the time of original pricing.
A term used to describe the sale or trading of securities at market prices – not at the time of original offer.
A rule promulgated by the Securities and exchange Commission that requires underwriters of municipal obligations to obtain and review certain disclosure materials prior to making a commitment to purchase securities.
Also continuing disclosure via EMMA.
Taxable Equivalent Yield
The yield an investor in a certain tax bracket would need to obtain on a taxable investment to equal the yield on a tax-exempt security. The equation is: tax-exempt yield/(1-investor’s tax bracket)=taxable equivalent yield.
A component of underwriting spread, take-down is a fee expressed either as dollars per thousand dollars of par value or as a percent of par value.
Take-down often is referred to as the sales commission component of the underwriter spread.
In the municipal market, the term is used broadly to refer to the firm that purchases a securities offering from a governmental issuer.
In some cases, the underwriter might be a team or syndicate of firms that have joined together to submit a bid for the issue.
True Interest Cost (TIC)
A method of calculating the overall cost of a financing that takes into account the time value of money.
The TIC is the rate of interest that will discount all future payments so that the sum of their present value equals the issue proceeds.
Preferred method used.
Governments can issue taxable debt for: A private activity; to avoid arbitrage problems; to get around debt volume caps; fund pension obligations.
The compensation paid to the underwriter for the purchase of the governmental obligation.
The underwriting spread is expressed as either dollars per thousand dollars of par value (e.g., $6.50) or as a percent of par value (0.65%).
Underwriting spread consists of four components: Take-down (referred to as sales commission), management fee, underwriting fee / risk and expenses.
An institution designated by the SEC as being eligible to receive disclosure documents from issuers. Bonds offered for sale after July 1, 1995 require the issuer to disclose financial data and material events to a NRMSIR.
Nationally Recognized Municipal Securities Information Respository.
A municipal bond offering in which a sponsor sells an issue of bonds with proceeds used by a number of cities or other tax-exempt organizations.
The pool permits small cities with low borrowing requirements to reduce the underwriting and interest costs inherent in a small issue.
The debt of a political entity, such as a state where its tax base overlaps the same tax base of another political entity, such as a city within the state.
- A fund accumulated and set aside by a government
- agency for the purpose of periodically redeeming municipal bonds.
The average length of time an issue of serial bonds and/or term bonds with mandatory sinking funds and/or estimated prepayments is expected to be outstanding. It also can be the average maturity of a bond portfolio.
Tax Increment Financing (TIF)
Tax increment financing (TIF) allows cities to create special districts and to make public improvements within those districts that will generate private-sector development.
- The tax base is frozen at the predevelopment level and taxes
- derived from increases in assessed values (the tax increment) either go to retire bonds issued to originate the development, or leverage future growth in the district.
The Electronic Municipal Market Access system, or EMMA, is a comprehensive, centralized online source (web site) for free access to municipal disclosures, market transparency data and educational materials about the municipal securities market.
- A company that assigns credit ratings for issuers
- of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings.
- A record, kept by a transfer agent or registrar
- on behalf of the issuer, that lists the names and addresses of the holders of registered bonds.
Build America Bonds
- Taxable municipal bonds that carry special tax credits and federal subsidies for either the bond issuer or the bondholder. Build America Bonds were created under Section 1531 of Title I of Division B of the American Recovery and Reinvestment Act that U.S. President Barack
- Obama signed into law on February 17, 2009.
What is yield curve?
Relationship between the bond interest rate and the bond maturity.
Inverted yield curve means what type of market?
Unstable market conditions.
An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.
Humped yield curve means?
Intermediate maturities high
- A relatively rare type of yield curve that results when the interest rates on medium-term fixed income securities are higher than the rates of both long and short-term instruments. Humped yield curves are also known
- as bell-shaped curves.
A market with a humped yield curve could see rates of bonds with maturities of one to five years trumping those with maturities of less than one year or more than five years. However, this type of yield curve does not happen very often. Although a humped yield curve is often an indicator of slowing economic growth it should not be confused with an inverted yield curve.
Normal yield curve means?
Longer maturities have higher rates of return.
A yield curve in which short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality. This gives the yield curve an upward slope. This is the most often seen yield curve shape.
Sometimes referred to as "positive yield curve".
- This yield curve is considered "normal" because the market usually expects more compensation for greater risk. Longer-term bonds are exposed to more risks such as changes in interest rates and an increased exposure to potential defaults. Also, investing money for a long period of time means an investor is unable to use the money in other ways, so the investor is compensated for this through the
- time value of money component of the yield.
Right of holder to cash out principal & interest; excercised if interest rates rise significantly.
- A put or put option is a contract between two parties to exchange an asset, the underlying, at a specified price, the strike, by a predetermined date, the expiry or maturity.
- One party, the buyer of the put, has the right, but not an obligation, to sell the asset at the strike price by the future date, while the other party, the seller, has the obligation to buy the asset at the strike price if the buyer exercises the option.
Earlier the call option date, lower price issuer could get for bond.
Lower interest rate does not mean more call protection.
Higher credit ratings usually = _____ interest costs
What is underlying rating?
What rating would be without credit enhancements, published on request.
Surety policies are used in place of?
debt service reserve
What is MOB?
Municipal Over Bond and is the spread between municipal bond index and US Treasury index.
What are the risks of derivatives?
- Basis Risk
- Counterparty Risk
- Term Mismatch Risk - A risk category referring to the possibility of a swap dealer being unable to find an appropriate counterparty for a swap transaction where it is acting as the intermediary. Also known as the risk of an investor choosing various investment vehicles for his or her portfolio that are not suitable for their specific goals or circumstances.
- Termination Risk
- Rollover Risk
- Tax Event Risk
What are the differences between serial & term bonds?
- Serial mature on different date
- Term mature on same date
What is a Good Faith Deposit?
Paid by underwriter and typically 1 to 2 % of par value of the issue. To show good faith of selling the bonds.
What are SLGS?
State & Local Govt Securities.
The State and Local Government Series (SLGS) securities program was established in 1972 as the result of federal legislation enacted in 1969 which restricted state and local governments from earning arbitrage profits by investing bond proceeds in higher yielding investments. In 1992, SLGS were centralized within the Special Investments Branch (SIB) of the Office of Public Debt Accounting in Parkersburg, WV. SLGS securities are offered for sale to issuers of state and local government tax-exempt debt to assist with compliance of yield restriction or arbitrage rebate provisions of the Internal Revenue Code. Subscribers may invest in time deposit or demand deposit types of securities. All SLGS securities are issued in book-entry form and are non-marketable.
The securities are issued as Certificates of Indebtedness, Notes, or Bonds.
- Maturity length can be 15 days up to 40 years.
- The interest rate earned on time deposit securities is one basis point below the current estimated Treasury borrowing rate for a security of comparable maturity.
F.S. 200.065 “County of special financial concern”
Means a county considered fiscally constrained pursuant to s. 218.67 and for which 1 mill will raise less than $100 per capita.(b) “Municipality of special financial concern” means a municipality within a county of special financial concern or a municipality that has been at any time since June 30, 2002, in a state of financial emergency pursuant to s. 218.503.
F.S. 218.25 - Limitation of shared funds; holders of bonds protected; limitation on use of second guaranteed entitlement for counties
The second guaranteed entitlement for counties may be assigned, pledged, or set aside as a trust for the payment of principal or interest on bonds, tax anticipation certificates, or any other form of indebtedness, including obligations issued to acquire an insurance contract or contracts from a local government liability pool and including payments required pursuant to any loan agreement entered into to provide funds to acquire an insurance contract or contracts from a local government liability pool.
- As an additional assurance to holders of bonds issued before April 18, 2000, which are secured by the guaranteed entitlement or second guaranteed entitlement for counties, or bonds issued to refund such bonds which mature no later than the bonds that they refunded and which result in a reduction of debt service payable in each fiscal year, it is
- the intent of the Legislature that, to the extent the elimination of tax sources dedicated to funding the guaranteed entitlement.