Serial bond

Abstract: Municipal bonds traditionally have been classified into two general types: term bonds, paid off in a lump sum at the end of the term of the loan, and serial bonds, retired in annual installments. Beginning in the late 1970s, however, a number of new fiscal instruments have been devised to meet the changing needs of the municipal bond market. While these new financing techniques are not a panacea, their careful application may uncover some real opportunities for meeting the needs of local government for expanded capital facilities.

Abstract: Acknowledgments ix Introduction xiii A 1 ability to pay acceleration additional bonds test advance refunding advertised sale All bonds go to heaven Ambac AMT appropriation arbitrage Arkansas Default of 1933 auction-rate securities auction sale authorities B 14 bank-qualified basis points Baum pools Bell, California, pay scandal bid rigging black-box deals blind pools Blue List BOCES bond anticipation notes bond banks The Bond Buyer Bond Buyer indexes bond counsel Bond Daddies bond purchase agreement bond year book-entry-only system Bradford zeroes Build America Bonds C 28 CAFR calls Canadian interest cost capital appreciation bond capital gains certificates of participation Chapter 9 charter schools closed-end funds cogeneration projects colleges and universities community development districts competitive sale computers constitutional protection of tax-exemption convention centers CPI-linked municipals cram-down credit default swaps credit enhancement current refunding CUSIP D 43 Deadly Sins debt per capita default Denver International Airport Dillon s rule dirt bonds disclosure Dodd-Frank Wall Street Reform and Consumer Protection Act Mrs. Dodge E 52 elections EMMA escrow churning escrowed to maturity F 63 feasibility studies Fed Flow of Funds report Ferber trial 50 percent coupon financial advisers fiscal year 501(c)(3) issuers flipping floaters/inverse floaters flow control G 71 garbage gas prepayment bonds GASB general obligation GFOA golf courses government census guaranteed investment contracts H 78 Hammersmith Heartland fund implosion house museums I 84 Ideas in public finance blow in from the West indenture Indian tribes industrial development bonds initiative and referendum insider trading insurance interest inverse floaters investment pools issue price issuer concentration J 101 Jefferson County, Alabama K 109 Kentucky Department of Finance v. Davis L 111 laddering last looks lease financings legal opinion letters of credit liens limited obligation M 115 market activity Marks-Roos Mello-Roos mini bonds moral obligation mortgage bonds MSRB Municipal Assistance Corporation municipal utility district mutual funds N 122 negotiated sale net asset value net interest cost New Jersey pension obligation bonds of 1997 New Jersey Turnpike scandal of 1993 New York City financial crisis of 1975 NRO O 131 official statement OPEB open-end funds Orange County, California original issue discount out-of-state authorities P 142 par pay-to-play pension obligation bonds pensions People don t buy municipal bonds to get rich they buy municipal bonds to stay rich Philadelphia trial PIT bonds preliminary official statement premium bonds premium laundering prerefunded bonds price to the par call pricing principal private placements Proposition 21/2 Proposition 13 public private partnerships Puerto Rico pyramid bonds Q 162 Qualified School Construction Bonds Qualified Zone Academy Bonds R 163 ratings the ratio Recalibration of 2010 redemption refunding repudiation reserve fund retail order periods revenue bonds RFPs risk factors rollover Rule 15c2-12 rum bonds S 174 Saco, Maine scales sealed bids secondary market serial bonds William F. G. Shanks stadiums state intercept programs swaps synthetic fixed rates T 181 take and pay, take or pay takedown tax anticipation notes tax caps tax-exemption tax increment financing taxable municipals taxable tails tender-option bond programs term bonds Texas Permanent School Fund tobacco bonds toll roads total return tourist attractions Tower Amendment trick coupons true interest cost trustee U 197 ultra vires underwriters unfunded pension liabilities V 200 value per capita variable-rate demand obligations W 203 Washington Public Power Supply System waste-to-energy facilities Who owns municipal bonds? willingness to pay window bonds Y 209 yield burning yield curves yield to maturity Z 213 zero-coupon bonds About the Author 215

Abstract: The Investment Bankers Association for many years encouraged the use of the net interest cost method of computing the cost of a bond issue [e.g., 1, pp. 128-131]. This usage did not generate much excitement in the financial or academic communities until the fall of 1972. In October 1972, a $25 million pollution control bond issue of the state of Minnesota made headlines in business periodicals and the financial sections of many newspapers. The bonds were awarded to Dillon, Read underwriting syndicate, since their bid represented the lowest "net interest cost." The reason the issue generated headlines was that it paid 50% interest per year for bonds maturing in the first four years after issue. Bonds maturing in later years paid lower interest rates, and bonds maturing after 1986 promised to pay 0.1 per year. Hopewell, Kaufman, and West [3] estimate that Minnestoa's use of the net interest cost method will cost the state an extra $1 million. In municipal issues bonds maturing early generally carry a relatively higher interest rate than those maturing in later years. The motivation for such payout arrangements lies in the use of the net interest cost method of computing the cost of the bond issue. While the Minnesota issue attracted a great deal of attention, this type of issue is not rare. For example, in November 1972, Harford County, Maryland, awarded $6 million of bonds to a syndicate headed by Chase Manhattan Bank where the interest rate was 7% for ten years and then declined to 1/10% for bonds maturing in 1997. Once or twice a week "tombstones" published in the financial newspapers announce similar types of issues. It will be argued here that the use of net interest cost introduces an undesirable bias into the decision process. If we assume that the investment banking community understands the nature of the bias, but that municipal and state financial officers do not, then this is an undesirable situation. The governmental financial officer thinks he is accepting the lowest cost offer but may actually be accepting an offer that can easily be the highest cost. Rules of thumb tend to be accepted when they give reasonable results for recurring situations. The net interest cost method used by investment bankers is such a rule of thumb and the effects of using the calculation seem to be acceptable to practitioners. The results are consistent with the actuarial yield of the bond, if the calculations are applied to one bond issue paying the same amount of interest throughout the life of the bond. If there are serial bonds paying greatly different amounts of interest, the measure is unreliable. It has been criticized in the theoretical literature [e.g., 5] but continues to be used in practice.