bearer bond
- redeem when it matures
- redeem when it is called
- holder may have to worry about missed interest payments
- if holders fail to collect principal or fail to see redemption notice they do not lose anything except an interest payment on the bond
registered bonds
- holder can redeem by sending bond certificate to issuer
- issuer sends holder a check for principal + accrued interest
- holder may have to worry about missed interest payments
- if holders fail to collect principal or fail to see redemption notice they do not lose anything except an interest payment on the bond
book entry bonds
- trustees send principal amount and last interest payment to name on books
- book-entry: no worry about missed interest payments
notice of redemption
- issuers must give notice 30 days before they call bonds and publish intent in national financial publication like Wall Street Journal
how bonds are called
term bonds
- called on a random selection basis
serial bonds
- called in inverse chronological order of maturity
- random basis, if only a portion of a year's issue is called
Bond Buyer
- if a bond called, it will be listed in Bond Buyer
- broker/dealers have obligation to tell clients about call
A municipality has issued a serial bond. The city has just had an influx of money and would like to call the bonds. By what method would the city call the bonds?
- inverse chronological order
- serial bonds-taken oldest first-highest interest rates
- term bonds-random method
Overlapping debt
- general obligation bond-shared debt by two taxing areas, benefits both areas
Net direct debt
- net direct debt=(old debt + newly proposed debt)/(city population)
- net debt=(old debt+overlapping debt+newly proposed debt)/(city population)
coterminus debt service
- when 2 or more municipal areas have same boundaries
- all debt is overlapping
Analyzing revenue bonds
- in bond indenture, look at flow of funds-how $ spent, is issuer good for it, revenues pledge-how interest will be paid
- covenants-rate, insurance-insurance for project, maintenance
- feasibility studies, competitive analysis, engineering studies, capital improvements, can issuer raise rates freely without muni or government interference, study- is customer base diversified?, comparison of rates in similar projects locally, tax base and population-growing?,shrinking?
Which of the following is the method of finding the net debt of a municipality?
- (Municipal debt + overlapping debt)/ (city population)
- net debt includes overlapping debt
debt service
- $ of principal and interest/year
- term bond-same until maturity date-same interest cost + principal
- serial bond-principal + interest, can change
- level debt service-principal + interest, same through life of bond
debt service coverage
- (gross revenues pledge)=(total revenues)/(debt service)
- net revenues pledge=(total revenues-maintenance/debt service)
Municipal bond insurance
- in case muni defaults on interest and principal payments
- MBIA-Municipal Bond Insurance Association
- AMBAC-American Municipal Bond Assurance Corporation
- FGIC-Federal Guarantee Insurance Corporation
A municipality has insurance on its outstanding $40 million general obligation. By purchasing insurance, the issuer:
- Providing a means to have principal and interest paid in event of default by municipality.
