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Glossary of Municipal Finance Terms
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Ad Valorem Tax A tax based on the value (or assessed value) of property.
Annual Return - The total return of a security over a specified period, expressed as an annual rate of interest.
Arbitrage A reference to the difference between the yield (interest) on governmental obligations exempt from Federal tax under Section 103 of the Internal Revenue Code and the yield on securities and obligations that are not exempt from Federal tax in which the proceeds of the governmental obligations are invested.
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Bond An interest-bearing promise to pay a specified sum of money the principal amount due on a specific date to the holder or owner. The terms "Bond" and "Note" are often used interchangeably.
Bond Anticipation Note(BAN) Notes issued by public agencies to obtain temporary financing for Projects that will eventually be financed on a long-term basis (and the BAN repaid) through the sale of Bonds.
Bond Counsel's Opinion Opinion which usually addresses (1) whether the Bonds are valid and binding obligations of the Issuer; (2) the source of payment or security for the Bonds; and (3) whether and to what extent interest on the Bonds is exempt from Federal income taxes and from taxes, if any, imposed by the state of Issue.
Broker A person or firm acting as an agent for buyers and sellers, charging a commission for services rendered.
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Call Exercise of the right of the Issuer to prepay its debt prior to the specified maturity date and demand surrender of its Bonds for redemption, refunding or sinking fund purposes on a specific date at a specified price at or above par.
Capital Accumulator Bonds (also known as Accreted Value Bonds) Bonds which bear no interest payable periodically but which accrete in value from the date of issuance to the date of maturity in lieu of interest.
Capital Gain A profit realized from buying a security at one price and subsequently selling it at a higher price.
Capitalized Interest A portion of the proceeds of an Issue which will be used to pay interest on the Bonds for a specific period of time (usually the period of construction of the Project financed by the Issue).
CD (Certificate of Deposit) An interest-bearing negotiable certificate representing a time deposit of fixed maturity issued by a commercial bank which is traded on a yield basis with interest computed for the actual number of days held on the basis of a 360-day year.
Collateral Securities or other property pledged by a borrower to secure payment of a loan.
Coupon The part of a Bond that denotes the amount of interest due, and on what date and were the payment is to be made. Coupons are presented to the Issuer's designated paying agent or deposited in a commercial bank for collection.
CUSIP The Committee on Uniform Security Identification Procedures, which was established under the auspices of the American Bankers Association to develop a uniform method of identifying municipal, United States government, and corporate securities.
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Debt Service The total payments of principal and interest required in a given time period.
Debt Service Reserve Fund The fund usually held by the Trustee under the Indenture established for payment of debt service on Bonds in the event pledged receipts are insufficient. The fund usually holds an amount equal to maximum annual principal and interest payments on the Bonds, and is usually funded from proceeds of the Issue.
Discount The amount (stated in dollars or a percent) by which the selling or purchase price of a security is less than the principal amount or par value.
DTC (Depository Trust Company) A central securities certificate depository through which members effect security deliveries among themselves via computerized bookkeeping entries.
Due Diligence Investigation conducted by Underwriters and their counsel and, in some cases also by bond counsel and Issuer's counsel to determine whether all material items in connection with the Issuer, the Issue and the security for the Issue have been accurately disclosed in the Official Statement (or if a Private Placement in the Placement Memorandum) and that no material disclosure has been omitted.
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Federal Reserve Banking System The central banking system of the United States. There are 12 regional Federal Reserve Banks.
Floating Interest Rate (or Variable Interest Rate) The rate of interest on a Bond or Note which varies according to a formula set forth in the security. Variable interest rates are most often tied to the prime rate of a particular lending institution, the Consumer Price Index, Federal Funds rates or other money market measurements.
Flow of Funds The structure established in the security documents for the receipt, deposit, transfer and application of the pledged revenues.
Fully Invested Reference to a portfolio that has no assets in the form of cash or cash equivalents.
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General Obligation (GO) A security; the payment of which is secured by a pledge of the Issuer's full faith and credit.
Guaranteed Investment Contracts (GICs) Product offered by life insurance companies to pension funds which pay investors a stated rate of return, usually approximation the current yield on high grade Bonds, for a stated term (usually not exceeding ten years).
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Indenture A deed or contract which may be in the form of a Bond resolution and sets forth the legal obligations of the Issuer with respect to the securities and names a Trustee who holds funds and security under the Indenture, makes payment of principal and interest to the security holders and acts on behalf of the holders in the event of a default.
Initial Offering Price The price (based upon yield to maturity) stated as a percentage of par at which the original purchaser determines to market the Issue during the initial offering period. If the original purchaser is an Account, members of the Account may not offer any part of the Issue at any other price during that period. If a large principal amount of the Issue remains unsold at the end of the initial offering period, the Account may at that time adjust the offering price.
Interest Compensation paid or to be paid for the use of money, measured in terms of a percentage per annum of the principal amount.
Investment The utilization of money in the expectation of future returns in the form of income or capital gain.
Investment Banker (Underwriter) An individual or firm engaged in the financing of capital. The Investment Banker purchases securities from the Issuer for resale to investors.
Issue A specific identified issue of securities (e.g., "Water and Sewer Revenue Demand Bonds, Series 1983").
Issuer The public entity (state, political subdivision, agency, or authority) that issues securities in order to borrow money.
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Loan Agreement A document under which an Issuer loans the proceeds of an Issue to a party in return for a promise to repay the loan, with interest, to the Issuer, or to another on the Issuer's behalf (e.g., the Trustee), to provide security and to meet other obligations.
London Interbank Offered Rate (LIBOR) The posted rate at which prime banks offer to make Eurodollar deposits available to other prime banks for a given term which can range from overnight to five years.
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Maturity Date The stated date on which all or a stated portion or the principal amount of a security becomes due and payable.
Maturity Schedule The schedule (by dates and amounts) of principal maturities of an Issue.
Moral Obligation Bond A municipal security that is not backed by the full faith and credit of the Issuer, but state law permits the Issuer or other government entity to recognize a moral, rather than a legal, obligation to provide a means of payment of the security.
Municipal Bond A security issued by or on behalf of a state or political subdivision, the interest on which is exempt from federal income tax.
Municipal Securities Rulemaking Board (MSRB) An independent, self-regulatory organization established by the Securities Act Amendments of 1975 and charged with primary rulemaking authority for the municipal securities industry.
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Net Revenues Pledged revenues remaining after deduction for or payment of operation and maintenance expenses.
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Parity Debt An Issue of securities with claim on the same underlying security for and source of payment of debt service equally and ratably with other outstanding Issues.
Paying Agent The institution (usually a bank or trust company) identified on the security as the agent designated by the Issuer to make payment of principal and interest.
Pledged Revenues The moneys which are the subject of a Pledge contained in an indenture or other security document.
Pollution Control Bond (PCB) A tax exempt security issued by a state, certain agencies or authorities, a local government or development corporation to finance the construction of air or water pollution control facilities or sewage or solid waste disposal facilities pursuant to Federal law and backed by the credit of the pollution control entity rather than the credit of the Issuer.
Preliminary Official Statement A version of an Official Statement in preliminary form without pricing, yield or maturity information used by the Issuer or Underwriters to inform the public prior to receipt of bids at competitive bidding or prior to the assignment of an interest rate and offering price in a negotiated sale. Orders for the security may not be taken based on a distribution of these preliminary documents, and a statement to this effect is usually contained on the cover page, printed in red, and thus the preliminary document is often referred to as the "Red Herring".
Premium Bond A Bond selling above par; the opposite of a Discount Bond.
Principal Amount The face amount of a Bond, exclusive of accrued interest and payable at maturity or, as to an Issue, the aggregate principal amount of the Issue.
Private Placement The original placement of an Issue with one or an few investors (usually banks, life insurance companies, pension funds, or other financial institutions) as opposed to being publicly offered and sold. Private placements are not subject to the Securities Act of 1933.
Pro Forma A revenue projection showing anticipated costs and revenue for the period of the projection, generally not more than five years.
Public Sale Sale of an Issue by an Issuer by competitive bidding whereby the Issue is sold to the bidder offering to buy the Issue at the lowest net interest cost to the Issuer.
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Rating Letter and number symbols used by Rating Agencies to express their evaluation of the relative creditworthiness of an Issue.
Rating Agencies Organizations which provide the service of evaluating the relative creditworthiness of Issues and assigning Ratings to them, such as Moody's Investors Service, Inc., Standard & Poor's Corporation, and Fitch's Investors Service.
Refunding The sale of an new Issue, the proceeds of which are to be used to pay debt service on and retire an outstanding Issue. The purpose of refunding may be to save interest cost, extend the maturity of the debt or remove restrictive covenants in the security documents.
Registered Bond A Bond the owner of which is registered with the Issuer or Trustee either as to both principal and interest or as to principal only. Transfer of ownership can only be accomplished when the securities are properly endorsed by the registered owner and the transfer recorded on the registration books.
Reserve Fund A fund (funded from securities proceeds, pledged revenues, or otherwise) usually held by the Trustee under the Indenture, and maintained in a stated or determinable amount sufficient to cover some unusual operation or maintenance expense or some interruption of Pledged Revenues. See Debt Service Reserve Fund.
Reserve Requirements The percentage of deposits required to be held as reserves, determined by the Federal Reserve Banking System, within limits legislated by Congress.
Revenue Bond A Bond the debt service on which is payable solely from the revenue generated from the operation of the facilities being financed or from other non-tax sources.
Roll Over The issuance of renewal Notes to retire outstanding Notes.
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Securities and Exchange Commission (SEC) An agency created by Congress to enforce laws for the protection of investors in security transactions.
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Tax Anticipation Note (TAN) A Note issued in anticipation of the future receipt of the proceeds of taxes assessed by the Issuer.
Treasury Bill A non-interest-bearing obligation, fully guaranteed by the United States Government, payable to the bearer. Bills are sold on a discount basis so that the yield is the difference between the purchase price and the face value thereof.
Trustee A bank or trust company designated by the Issuer or borrower under the Indenture as the custodian of funds and official representative of bondholders.
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Underwrite To agree to buy an Issue of securities on a given date at a specific price or to agree to buy unsubscribed securities of an Issue, thus assuming the liability of guaranteeing the Issuer the full anticipated proceeds.
Underwriting Spread An amount representing the difference between the price at which securities are bought from the Issuer by the Underwriter and the price at which they are reoffered to the investor.
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Variable Interest Rates Interest rates which vary according to a formula expressed in the securities. Variable interest rates most commonly are tied to the prime rate of a particular lending institution, the Consumer Price Index, Federal Fund rates or other money market measurements.
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