Series 7

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Municipal Bonds

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Are securities issued either by the state or local government or by U.S. teritories, authorities, and special districts.

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Securities Exchange Act of 1934

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Municipal securities are exempt from the filing requirements of the Act of 1933. However, like all other securities, they are subject to the antifraud provisions of the Securities Exchange Act of 1934

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Doctrine of Reciprocal Immunity (Doctrine of Mutual Reciprocity)

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The doctrine specifies that a level of government can tax only the interest of its own issues. Interest on municipal securities may be taxed by the municipal level (state and local governments) but not by the federal governement.

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Sinking fund account

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Some issues establish a sinking fund account to accumulate funds to pay off term bonds at or before the established maturity date.

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Dollar bonds

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Term bonds are quoted by price (like corporate bonds) and called dollar bonds.

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General Obligation bonds (GOs)

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Are municipal bonds issued for capital improvements that benefit the entire community.

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Full faith and credit issues

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General Obligation bonds are known as full faith and credit issues. GOs: Typically, these projects do not produce revenues, so principal and interest must be apid by taxes collected by the municipal issuer.

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Ad Valorem

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Bonds issued by towns, cities, and counties are backed by property (ad valorem) taxes, license fees, fines, and all other sources of revenue to the municipatlity.

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Voter Approval

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If an issuer wishes to issue GO bonds that would put it above its statutory limit, a public referendum if required.

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Tax Limits

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Some states limit property taxes to a certain percentage of the assessed property value or to a certain percentage increase in any single year. The tax rate is expressed in mills; one mill equals $1 per $1,000, or $.001.

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Limited Tax GO

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A limited tax GO is a bond secured by a specific tax (e.g., income tax). The issuer is limited as to what tax or taxes can be used to service the debt. As a result, there is more risk with a limited tax GO than with a comparable GO backed by the full taxing authority of the issuer.

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Overlapping Debt

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Several taxing authorities that draw from the same taxpayers can issue debt. Bonds issued by different municipal authorities that tap the same taxpayer wallets are known as coterminous debt.

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Double-Barreled Bonds

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Double-barreled bonds are revenue bonds that have characteristics of GO bonds. Interest and principal are paid from a specified facility's earnings.

However, the bonds are also backed by the taxing power of the state or municipality and therefore have the backing of two sources of revenue. Although they are backed primarily by revenues from the facility, double-barreled bonds are rated and traded as GOs.

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Revenue bonds

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can be used to finance any municipal facility that generates sufficient income. Revenue bonds are not subject to statutory debt limits and do not require voter approval.

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Trust indenture (or bond resolution)

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The face of a revenue bond certificate may refer to a trust indenture (or bond resolution). This empowers the trustee to act on behalf of the bondholders.

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Rate covenant

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a promise to maintain rates sufficient to pay expenses and debt service

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Maintenance covenant

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a promise to maintain the equipment and facility(ies)

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Insurance covenant

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a promise to insure any facility built so bondholders can be paid off if the facility is destroyed or becomes inoperable

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Additional bonds test

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Whether the indenture is open-ended (allowing further issuance of bonds with the same and equal claims on assets or revenues if permitted udner the provisions of the bond indenture) or closed-ended (allowing no further issuance of bonds with an equivalent lien on assets or revenues); with a closed-end provision, any additional bonds issued will be subordinated to the original issue unless the funds are specifically required to complete contstruciton of the facility.

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Sinking fund

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money to pay off interest and principal obligations

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Catastrophe clause

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a promise to use insurance proceeds to call bonds and repay bondholders if a facility is destroyed; a catshtrophe call is also called a calamity call or an extraordinary mandatory call.

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Flow of funds

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the priority of disbursing the revenues collected

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Books and records covenant

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requires outside audit of records and financial reports

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Industrial Developement Revenue Bonds

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A municipal developement authority issues industrial developement revenue bonds (IDRs or IDBs) to construct facilities or purcharse equipement, which is then leased to a corporation. The municipality uses the money from lease payments to pay the principal and interest on the bonds.

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Tax Reform Act of 1986

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Under the Tax Reform Act of 1986, the interest on these nonpublic purpose bonds may be taxable because the act reserves tax exemption for public purposes.

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Lease Rental Bonds

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Under a typical lease-rental (or lease-back) bond arrangement, a municipality issues bonds to finance office contruction for itself or its state or community.

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Certificates of Participation (COPs)

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These are a form of lease revenue bond that permits the investor to participate in a stream of revenue from lease, installment, or loan payments related to the acquistition of land or the acquisition or construction of specific equipment or facilties by the municipality.

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Special Tax Bonds

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These are bonds secured by one or more designated taxes other than ad valorem (property) taxes.

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Special Assessment Bonds (or Special District Bonds)

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Are issued to finance the constructions of public improvements such as streets, sidewalks, or sewers.

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New Housing Authority bons (NHAs)

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Local housing authorities issue NHAs to develop and improve low-income housing.

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Public Housing Authority bonds (PHAs)

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NHAs are sometimes called PHAs because of their federal backing, they are considered the most secure of all municipal bonds. PHAs are backed by the rental income from the housing. Note that these bonds are not considered to be double barreled. To be double barreled, a bond must be backed by more than one municipal revenue source. In this case, the second backing is the federal governement.

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Moral Obligation Bonds

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A moral oblication bond is a state or local-issed, or state or local agency-issed, bond. If revenues or tax collections backing the bond are not sufficient to pay the debt service, the state legislature has the authority to appropriate funds to make payments.

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Issuer Default

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If a GO bond goes into default, bondholders have the right to sue to compel a tax levy to pay off the bonds. If a moral obligation bond goes into default, the only way bondholders can be repaid is through legislative apportionment.

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Municipal anticipation notes

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are short-term securities that generate funds for a municipality that expects other revenues soon.

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TANs

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Municipalities issue tax anticipation notes (TANs) to finance current operations in anticipation of future tax receipts. This helps municipalities to even out cash flow between tax collection periods.

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RANs

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Revenue anticipation notes (RANs) are offered periodically to finance current operations in anticipation of future revenues from revenue productin projects or facilities.

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TRANs

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Tax and revenue anticipation notes (TRANs) are a combination of the characteristics of both TANs and RANs.

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BANs

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Bond anticipation notes (BANs) are sold as interim financing that will eventually be converted to long-term funding through a sale of bonds.

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Tax-exempt commerical paper

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Tax-exempt commerical paper is often used in place of BANs and TANs for up to 270 days, though maturities are most often 30, 60, and 90 days.

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CLNs

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Construction loan notes (CLNs) are issued to provide interim financing for the construction of housing projects.

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Variable rate demand notes

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Variable rate demand notes have a fluctuating interest rate and are usually issed with a put option

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GANs

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Grant anticipation notes (GANs) are issued with the expectation of receiving grant money from the federal government.