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28 Glossary of Key Terms This glossary includes common public finance terminology, terminology specific to transportation capital investments, and terminology relevant to federal legislation and programs. a Ad valorem tax: A tax based on property value. It also may be based on the assessed value of the property. Additional bonds test: A legal requirement that new additional bonds that will have a claim to revenues already pledged to outstanding revenue bonds, can be issued only if certain financial or other requirements are met. Advance construction: States or local governments independently raise upfront capital required for a federally approved project and preserve eligibility for future federal-aid reimbursement for that project. At a later date, the state can obligate federal-aid highway funds for reimbursement of the federal share. This tool allows a state to take advantage of access to a variety of capital sources, including its own funds, local funds, anticipation notes, revenue bonds, bank loans, and so on, to speed project completion. Advance refunding: Advance refunding is a financing technique that allows an issuer to obtain the benefit of lower interest rates when the outstanding bonds are not currently callable. The proceeds from the sale of the refunding bonds are used to purchase taxable government securi- ties, which are deposited in an escrow account. The escrow account is structured so that the principal and interest earned on the securities are sufficient to pay all principal, interest, and call premium, if any, on the outstanding bonds up to and including the call date. The refunding bonds are secured by the same sources of taxes or revenue previously pledged to the payment of the outstanding bonds. Amortization: Paying off of debt with a fixed repayment schedule in regular installments over a period of time. Appropriation: An authorization by a legislative body to set aside cash for a specific purpose. Arbitrage: With respect to the issuance of municipal securities, arbitrage usually refers to the dif- ference between the interest paid on tax-exempt bonds and the interest earned by investing the proceeds of the tax-exempt bonds in higher-yielding taxable securities. Federal income tax laws generally restrict the ability to earn arbitrage in connection with tax-exempt bonds or other federally tax-advantaged bonds. The 1986 Tax Reform Act states that these earnings must be rebated to the federal government unless certain conditions are met. Assessed valuation: The valuation by appropriate government entities of real property for the purposes of taxation. Asset: Any item of economic value, either physical in nature (such as land) or a right to ownership, expressed in cost or some other value, which an individual or entity owns. Availability payment: Availability payments are a means of compensating a private concessionaire for its responsibility to design, construct, operate, and/or maintain a tolled or nontolled roadway or other transportation infrastructure for a set period of time. These payments are made by a public project sponsor (for example, a state DOT or authority) based on particular project milestones or facility performance standards.
29 Average life: With respect to an issue of bonds, the weighted period of time required to repay half of the issue through scheduled principal payments. The average life, also referred to as the âweighted average lifeâ or âweighted average maturityâ or âWAM,â is a reflection of the rapidity with which the principal of an issue is expected to be paid. B Balloon payment: A principal amount, equal to a large percentage of the total principal amount, to be retired on a single date, often at maturity. Basis point: A shorthand financial reference to one-hundredth of one percent (0.01%) used in con- nection with yields and interest rates. Bid: The price someone will pay for a security or a purchase offer. Bond: An interest-bearing promise to pay a specified sum (the principal) on a specific date to the owner of the security. Bond anticipation note (BAN): Short-term obligations issued by public agencies to temporarily finance a project. Bonds are expected to be sold to repay the BANs and to provide long-term financing for the project. Bond bank: A means of lowering borrowing costs in which local government securities are pooled into larger offerings that provide the financing for the participating local government projects. Bond counsel: A lawyer or law firm, with expertise in bond law, retained by the issuer to render an opin- ion upon the closing of a municipal bond issue regarding the legality of issuance and other matters, including the description of security pledged and an opinion as to the tax-exempt status of the bond. Bond election or bond referendum: The process by which voters approve or reject bond issues. Bond insurance: A financial guarantee by a bond insurer of the payment of interest and principal of a bond issue should the issuer fail to make required payments. Bond proceeds: The money the issuer receives from its bond sale. The money paid to the issuer by the purchaser or underwriter of a new issue of municipal securities. These funds are used to finance the project or other purpose for which the securities were issued. Bond purchase agreement: An agreement between an issuer and the underwriter of the bonds. The terms of sale, conditions to closing, liability restrictions of the issuer, and any indemnity provi- sions are set forth in this document. Bond resolution: The document or documents in which the issuer authorizes the issuance and sale of municipal securities. Issuance of the securities is usually approved in the authorizing resolution, and sale is usually authorized in a separate document known as the âsaleâ or âawardâ resolution. All such resolutions, read together, constitute the bond resolution, which describes the nature of the obligation, the issuerâs duties to the bondholders and the issuerâs rights with respect to the obligations and the security for the obligations. In certain jurisdictions, the governing body will act by means of an ordinance (âbond ordinanceâ) rather than by resolution. Bond transcript: The complete set of legal documents associated with a bond issuance. Bond year: A unit of $1,000 of debt outstanding for 1 year (12 consecutive months). The number of bond years in an issue is equal to the product of the number of bonds (with one bond equal to $1,000 regardless of actual authorized denominations) and the number of years from the dated date (or other stated date) to the stated maturity.
30 Budget authority: Authority provided by law to enter into financial obligations that will result in immediate or future outlays of federal government funds. Budget authority includes the credit subsidy costs for direct loan and loan guarantee programs. Basic forms of budget authority include appropriations, borrowing authority, contract authority, and authority to obligate and expend off- setting receipts and collections. Buildâoperateâtransfer: Publicâprivate partnership arrangement involving private construction, private operation for a given period of time, and eventual transfer to public ownership. Bullet: An issue with a single maturity date, before which no principal or sinking fund payments are amortized. C Call: A provision that allows the issuer to prepay its debt before the maturity date of the security. Callable bond: A bond or note subject to redemption at the issuerâs option before its stated maturity. Call price: The specified price at which bonds are redeemed under a call provision. Call risk: Risk to the investor associated with prepayments by the issuer of the principal amount of the bonds before the stated maturity date, in accordance with the bondsâ redemption provisions. Capital appreciation bond (CAB): A long-term bond that pays no current interest but accretes or compounds in value from the date of issuance to the date of maturity. CABs differ from zero coupon bonds in that they are issued at an initial amount and compound in value; zero coupon bonds are issued at a deep discount and compound to par. Capital budget: A unified financial plan that accounts for needs and spending levels for a group of current and prospective capital facilities within a broader government budget. Capital expense: The expenses related to the purchase of tangible property or other items eligible to be capitalized. Generally, these include any items eligible as capital expense under federal, state, or local requirements. Capital lease: A lease in which the lessor finances only the leased asset, and all other rights of owner- ship transfer to the lessee. This results in the recordation of the asset as the lesseeâs property, in its general ledger, as a fixed asset. The lessee can record only the interest portion of a capital lease payment as expense, as opposed to the amount of the entire lease payment in the case of the more common operating lease. Capital reserves: Funds that remain in a bank and are not loaned. These funds can be used to support a variety of credit enhancement tools. Capital reserves also can be used to leverage the lending institution or borrow against reserves to expand the pool of available loan funds. Capitalization: Process of depositing various funds as seed capital into a lending institution to enable financial services. This pool of money is distributed, through loans and credit enhancements, in such a way as to ensure that payments are made to preserve the corpus. Capitalized interest: A specified portion of the original bond proceeds that will be used to pay interest on the bonds until revenue from planned sources becomes available, such as upon completion of construction. Certificate of participation (COP): A type of lease in which the lessor (or designated trustee) issues shares (in the form of COPs) that entitle the holder to a portion of the lessorâs interest in the lease.
31 Closing: The procedure by which a sale between the issuer and the buying group is completed. It is at the closing that the issuer delivers the securities to the buyers and the issuer receives the proceeds from the sale of securities. Collateral: Any property pledged as security for a loan. Comanager: A manager participating in a security offering who is normally not responsible for maintaining the books of account for the offering. Commercial paper (CP): Short-term obligations that mature within 270 days. The issuer typically pays maturing principal of outstanding CP with newly issued CP, referred to as a âroll over,â thereby borrowing funds on a short-term basis for an extended period of time. Rate reset periods may vary from 1 to 270 days and different portions of a single issue of CP may simultaneously have different reset periods. Competitive sale: A sale of securities in which underwriters submit bids to purchase the securities. The issuer awards the municipal securities to the âwinningâ underwriter or syndicate presenting a bid complying with the terms of a notice of sale that provides the lowest interest rate cost accord- ing to stipulated criteria set forth in the notice of sale. Conduit financing: The sale of bonds or notes by a government unit for the benefit of a third party, usually a private corporation. The securities issued are not considered general obligations of the conduit agency. Construction fund: The fund from which project costs are paid. A portion of the bond proceeds is deposited into this fund, which earns interest during the construction period. Contract authority: A form of budget authority that permits obligations to be made in advance of appropriations or receipts. Contract authority therefore is unfunded and requires a subsequent appropriation or offsetting collection to liquidate (pay) the obligations. The federal aid highway program has operated under contract authority since 1921. Corpus: All initial funds as well as additional and subsequent revenue deposited for bank capital- ization. A âbodyâ of funds that is available, on a revolving basis, for use in providing financial assistance to borrowers. Coupon: The periodic rate of interest due on a bond, usually calculated as an annual rate payable expressed as a percentage of the principal amount. Coupon bond: An interest-bearing bond. Covenant: A legally binding commitment between the issuer of municipal bonds and the bondholders. Credit: Promise of future payment given in exchange for money, goods, or services today. Credit enhancement: Financing toolsâsuch as letters of credit, bond insurance, debt service reserves, and debt service guaranteesâthat improve the credit quality of underlying financial commitments. Credit enhancements have the effect of lowering interest costs and improving the marketability or liquidity of bond issues. Credit ratings: Credit quality evaluations of bonds and notes made by independent rating services. A higher bond rating generally results in a lower interest rate that the borrower must pay. Credit score: A statistically based measure of risk of a particular type of loan to a particular borrower. Current discount rate: Discount rate used to measure the cost of a modification with respect to the modification of direct loans or loan guarantees. It is the interest rate applicable at the time of
32 modification on marketable Treasury securities with a similar maturity to the remaining maturity of the direct guaranteed loans, under premodification or postmodification terms, whichever is appropriate. Current yield: The ratio of interest to the market price of a bond. D Dated date: The date of an issue from which bondholders are entitled to receive interest. Dealer: A firm or an individual whose business is to act as a principal in the purchase and sale of securities. Debt limit: The limit on the principal amount of debt that an issuer may legally (or by policy) have outstanding at any time. Debt per capita: Outstanding debt amount divided by population, a measure of a jurisdictionâs overall level of indebtedness. Debt service: The sum of required principal and interest payments for a given period. Debt service coverage: The amount by which available revenues for debt service exceed the debt service amount, reflecting the number of times (e.g., 1.2) by which annual revenues exceed annual debt service. Debt service reserve fund: A fund in which funds are placed to be applied to pay debt service if pledged revenues are insufficient to satisfy the debt service requirements. Deep discount bonds: Bonds selling for far less than their face value, generally less than 80% of par. A deep discount bond will have a yield well above the stated coupon rate. Default: Failure to meet any obligation or term of a credit agreement, grant, or contract. Defeasance: To replace the existing security of an issue with another allowable security. Such a substitution is often necessary for refundings, which place sufficient funds in escrow to guarantee the payment of principal and interest on the issue being refunded. Delinquency: Failure of the debtor to pay an obligation or debt by the date specified in the agencyâs initial written notification or applicable contractual agreement, unless other satisfactory payment arrangements have been made by that date. Delinquency also would occur if, at any time thereafter, the debtor fails to satisfy the obligations under the payment agreement with the agency. Delivery date: The date on which the purchaser takes full possession of an issue. Denomination: The face value of a security. Derivative: A security with a price that is dependent upon or derived from one or more underlying assets (i.e., interest rate swap or synthetic rates). Design-build: A procurement or project delivery arrangement whereby a single entity (a contractor with subconsultants, or team of contractors and engineers, often with subconsultants) is entrusted with both design and construction of a project. This contrasts with traditional procurement, by which one contract is bid for the design phase and a second contract is bid for the construction phase of the project. Direct debt: The debt a municipality incurs in its own name.
33 Direct loan: A disbursement of funds by the government to a nonfederal borrower under a contract that requires repayment of such funds with or without interest. The term includes the purchase of, or participation in, a loan made by a nonfederal lender. The term also includes the sale of a govern- ment asset on credit terms of more than 90 days. Direct loan subsidy cost: Estimated long-term cost to the federal government of direct loans cal- culated on a present value basis, excluding administrative costs. The cost is the present value of estimated net cash outflows at the time the direct loans are discharged. The discount rate used on the calculation is the average interest rate (yield) on marketable Treasury securities of similar maturity to the loan, which is applicable to the time when the loans are disbursed. Direct placement: The same as private placement, in which a new issue is sold directly to one or several institutional investors instead of being offered publicly through underwriters. Discount: The amount by which the purchase price of a security is less than its par value. Double-barreled bond: A bond that is secured by more than one source. A common combination is the full faith and credit of the issuer and certain pledged revenues. Downgrade: Occurs when a rating agency lowers the rating of an issuer. Duration: The sum of the present values of each of the principal and interest payments of a security, weighted by the time to receipt of each payment, divided by the total of the present values of the payments. Unlike average life or average maturity, duration takes into account the timing of both principal and interest payments. e Effective interest cost: The rate at which the debt service on bonds would be discounted to provide a present value equal to the bid amount on the bonds. Effective yield: An investorâs rate of return when it sells a security. Enterprise debt: Debt that will be retired by the revenues earned by a facility. Equity: Commitment of money from public or private sources for project finance, with a designated rate of return target. Equivalent bond yield: The annualized yield on a short-term discount security expressed on a com- parable basis to yields on interest-bearing securities. Equivalent taxable yield: What a taxable security would have to yield to provide an investor with the same after-tax return as could be earned on a tax-exempt security. Escrow account: A fund established to hold monies pledged for a certain purpose, such as payment of debt service or construction costs. Event of default: A specific event, as defined in the financing documents associated with an issue, which allows the trustee or the bondholders to commence certain default proceedings as outlined in the issueâs security document. f Face amount: The par value (i.e., principal or maturity value) of a security. Fiduciary: An individual or trust given the responsibility of acting for the benefit of others.
34 Financial Industry Regulatory Authority (FINRA): An independent, not-for-profit organization authorized by Congress to protect Americaâs investors by making sure the brokerâdealer industry operates fairly and honestly. Flow of funds: The security documentsâ description of how revenues are to be collected, invested, transferred, and applied. Force majeure: A clause included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations. Full faith and credit: The pledge of the general taxing power of a government and all legally avail- able funds to pay its debt obligations. Generally associated with general obligation bonds. G General obligation (GO) bond: A municipal security that has payments secured by a pledge of the full faith and credit of the issuer. The issuer covenants to meet payment requirements through every legal means at its disposal. It generally is considered to be the strongest form of security pledge. Governmental Accounting Standards Board (GASB): Established by the Financial Accounting Foundation, the board writes accounting procedures for government bodies that, after approval by the federal government, become generally accepted accounting principles (GAAP). Governmental purpose bond: A term in the Internal Revenue Code for a tax-exempt bond that is secured by government revenues or the proceeds of which are used for a general government purpose (as opposed to a private activity bond). Grant anticipation notes (GANs): Short-term debt that is secured by grant money expected to be received after debt is issued. Financial institutions may buy anticipation notes on behalf of project sponsors in advance of receiving other financial assistance to enable a faster project start. Grant Anticipation Revenue Vehicles (GARVEEs): A GARVEE is any bond or other form of debt repayable, either exclusively or primarily, with future federal aid highway funds under Section 122 of Title 23 of the United States Code. Although the source of payment is federal aid funds, GARVEEs cannot be backed by a federal guarantee. Instead, they are issued at the sole discretion of, and on the security of, the issuing entity. Gross pledge: A pledge of all targeted revenues to the payment of debt service before the deduction of any operation and maintenance expenses. Gross proceeds: The total proceeds of a bond issue, including the original issue proceeds, the investment earnings on obligations acquired with the bond proceeds (including the repayment of principal), and any sums available to pay the issueâs debt service. Guarantee: A contract(s) in which a financial institution agrees to take responsibility for all or a portion of a project sponsorâs financial obligations for a project under specified conditions. Guaranteed investment contracts (GICs): Investment products secured by a contract with a financial institution that guarantees a fixed rate of return and a fixed maturity. H H.R. 3838: Refers to the Tax Reform Act of 1986 that revised existing federal tax law, including provisions affecting tax-exempt bond issues.
35 I Indemnification: The assumption by one party to a securities transaction of responsibility to pay or reimburse the costs, expenses, and other liabilities incurred by another party for certain specifi- cally enumerated events or occurrences. Indenture: A contract between the issuer of municipal securities and a trustee for the benefit of the bondholders. The trustee administers the funds or property specified in the indenture in a fidu- ciary capacity on behalf of the bondholders. The indenture, which is generally part of the bond contract, establishes the rights, duties, responsibilities, and remedies of the issuer and trustee and determines the exact nature of the security for the bonds. The trustee is generally empow- ered to enforce the terms of the indenture on behalf of the bondholders. In many governmental issues (particularly for general obligation bonds and some types of limited tax bonds and revenue bonds), the issuer may forego using an indenture and set forth the duties of the issuer and the rights of bondholders in the bond resolution. In certain transactions, the indenture may be called a âtrust agreement.â Industrial development bonds (IDBs) or industrial revenue bonds (IRBs): Securities issued by an entity to finance the business of a private corporation. The security backing for such issues is not the credit of the issuer but rather the credit of the private corporation. Initial offering price: The percentage of par price at which the original purchaser intends to market an issue. This price is based on yield to maturity. Installment loan: An obligation to repay monies borrowed at fixed intervals over time. Institutional investor: A financial institution, such as a mutual fund, insurance company, or pension fund, that purchases securities in large quantities. Interest: The amount paid by a borrower as compensation for the use of borrowed money. Interest payment date: The date on which interest is due to bondholders. Interest rate swap: A specific derivative contract entered into by an issuer or obligor with a swap provider to exchange periodic interest payments. One party agrees to pay the other at a fixed rate; the other pays the first party at an adjustable rate. Interest subsidy: A subsidy provided by a financial institution (such as multilateral lenders, state infrastructure banks, or export credit agencies) to lower overall financing costs for project sponsors. With this tool, project sponsors repay loans at less-than-current market rates. Market rates may be determined by the cost of borrowing through conventional issues of comparable duration. Interim financing: Financing needed to meet payment requirements between the time of closing and the time when the project begins to generate revenue. A construction fund often is set up as part of this financing. Inverted yield curve: When short-term interest rates are higher than long-term rates. Investment banker: An individual belonging to a firm engaged in the financing of capital. Invest- ment bankers are normally in the practice of purchasing new issue offerings for resale to investors with whom they communicate. Investment grade: A security that has a relatively low risk of default. Generally, bonds rated below triple-B (BBB) are considered to have speculative features and are deemed subinvestment grade. Issuance costs: The costs incurred by the issuer in connection with its offering. These include under- writer spread, feasibility study fees, legal counsel fees, financial advisory fees, and other costs.
36 Issue: A specific group of securities issued by an issuer. Issuer: The public entity borrowing money through the issuance of securities. J Junior debt (or junior lien bonds): Debt having a subordinate or secondary claim on an underlying security or source of payment for debt service relative to another issue with a higher priority claim. (See also subordinate claim.) Junk bonds: High-risk, high-return bonds that are below investment grade in rating. l Late charges: Amounts accrued and assessed on a delinquent debt; the term includes administrative costs, penalties, and additional interest. Lead manager(s): The manager(s) participating in a securities offering responsible for maintaining the books of account for the offering. Leaseâpurchase agreement: An installment sale in which a lease provides a means for the lessee to eventually acquire the leased property or asset. Letter of credit: An irrevocable commitment, usually made by a commercial bank, to honor demands for payment of a debt upon compliance with conditions and/or the occurrence of certain events specified under the terms of the letter of credit and any associated reimbursement agreement. A letter of credit frequently is used to provide credit and liquidity support for variable rate demand obligations and other types of securities. Bank letters of credit are sometimes used as additional sources of security for issues of municipal notes, commercial paper, or bonds, with the bank issu- ing the letter of credit committing to pay principal of and interest on the securities in the event that the issuer is unable to do so. Level debt service: Principal and interest payments that together represent equal annual payments over the life of a loan. Principal may be serial maturities or sinking fund installments. Level principal: A debt service schedule in which the annual amount of principal payments remains relatively constant over the life of the issue of bonds, resulting in declining annual debt service as the annual amount of interest payments declines. Leverage: A financial mechanism used to increase available funds usually by issuing debt (typically bonds) or guaranteeing or otherwise assuming liability for othersâ debt in an amount greater than cash balances. Leveraging ratio: Measures the extent to which a given investment attracts additional capital. In the context of this report, the leveraging ratio of federal funds is equal to the total project costs divided by the budgetary cost of providing federal credit assistance. Lien: A security interest (possibly a mortgage) in a piece of property. Limited liability bonds: Bonds that do not carry the full faith and credit pledge of a municipality. Limited tax bond: A general obligation bond the backing of which is only a specified portion of the taxing power of the issuer. Line of credit: A form of loan to be used only in the instance of a shortfall in net revenue for debt service or other financial commitments (i.e., a contingent loan).
37 Liquidation: Process of converting collateral to cash. Liquidity: Refers to an investorâs ability to sell an investment as a means of payment or easily con- vert it to cash without risk of loss of nominal value. Loan: Legally binding document that obligates a specific value of funds available for disbursement. The amount of funds disbursed is to be repaid (with or without interest and late fees) in accordance with the terms of a promissory note or repayment schedule. Loan guarantee: Contingent liability created when the federal government assures a private lender who has made a commitment to disburse funds to a borrower that the lender will be repaid to the extent of a guarantee in the event of default by the debtor. Loan servicer: A public or private entity that is responsible for collecting, monitoring, and report- ing loan payments. In the context of this report, a loan servicer would also assist in originating the loan. Loan-to-value ratio: Represents the proportion of the amount of a loan to the value being pledged to secure that loan. It is derived as follows: total financing costs (i.e., the market value of the col- lateral plus the financed portion of any closing costs, insurance premiums, or other transaction- related expenses less the borrowerâs cash down payment) divided by the market value of the collateral. Long term: Obligations that generally have a maturity of longer than 1 year. m Management fee: The percentage of the underwriting spread that goes to the manager(s) of the account. Manager: The underwriting firm(s) responsible for dealing with the issuer on behalf of the entire group of underwriters. Mandatory sinking fund: A standard means of paying term bonds in which deposits are made to an account for the express purpose of gaining interest and then being applied toward the term bond repayment. Mark-to-Market: A process whereby the value of an inventory position of securities is adjusted on a dealerâs records to its current market value. Markdown: The difference between the cost of securities and their current price, in cases in which the prices have fallen, or the amount received by a dealer selling securities to a third party for a customer. Market risk: The risk to bondholders that changes in the prevailing market interest rates will adversely affect the price of the bonds they hold. Market value: The current price of a security in its trading market. Master lease: A lease in which the lessee has the option (as defined by the leasing agreement) to add property to the existing lease. Master resolution: The document stating the general terms under which an issuer may offer more than one series of bonds. Maturity date: The date on which the specified principal amount of a security becomes due.
38 Moral obligation bond: A municipal security that does not have the backing of the full faith and credit of the issuer but that has means of payment morally (as opposed to legally) obligated to it. Municipal bond: A tax-exempt security issued on behalf of a state or any subdivision thereof, including cities, counties, and other local jurisdictions. Municipal lease (tax-exempt lease): A lease agreement in which the lessee is a state or local govern- ment and that exhibits interest payments that are exempt from the gross income portion of federal income tax. Municipal Securities Rulemaking Board (MSRB): The primary rule-making authority of the municipal securities industry. N Negotiated sale: The sale of a new issue of municipal securities by an issuer directly to an under- writer or underwriting syndicate selected by the issuer. A negotiated sale is distinguished from a sale by competitive bid, which requires public bidding by the underwriters. Among the primary points of negotiation for an issuer are the interest rate, call features, and purchase price of the issue. Net interest cost: Represents the average coupon rate of a bond issue, weighted to reflect the term and adjusted for the premium or discount. It does not consider the time value of money. Net pledge: The pledge to debt service payment of targeted revenues less operation and maintenance costs. Net proceeds: Total bond proceeds less the costs of issuance. Net revenues: Gross revenues less operating and maintenance expenses. New money issue: A bond issue used to generate new proceeds (rather than a refunding). Nominal (or face or par) value or amount: Amount of a bond, note, mortgage, or other security as stated in the instrument itself, exclusive of interest or dividend accumulations. The nominal amount may or may not coincide with the price at which the instrument was first sold, its present market value, or its redemption price. Noncallable bond: A bond that is not redeemable by the issuer before the maturity date. Nonfederal match: The commitment of state, local, or other nonfederal funds required to receive federal contributions. Notes: A short-term obligation of an issuer to repay a specified principal amount on a certain date, together with interest at a stated rate, usually payable from a defined source of anticipated revenues. Notes usually mature in 1 year or less, although notes of longer maturities are also issued. Notice of sale: A document describing the terms established by an issuer for a competitive sale of an anticipated new issue of municipal securities. It generally contains the date, time, and place of sale; amount of issue; type of security; amount of any good faith deposit; basis of award; name of bond counsel; maturity schedule; method of delivery; time and place of delivery; and bid form. o Obligation authority: The amount of budgetary resources (including new budget authority, bal- ances of unobligated budget authority carried over from prior years, and obligation limitations) available for obligation in a given fiscal year. With regard to the federal aid highway program,
39 obligation authority often refers to the amount of federal aid obligation limitation (established annually by Congress in appropriation acts) that is allocated to the states and that controls the amount of apportioned contract authority that can be obligated by the states in a given fis- cal year. Odd coupon: A coupon or interest payment that is longer or shorter than the normal 6-month pay- ment. It generally refers to the first interest payment of a new bond issue. Offering price: The price investors in an issue receive when the original purchaser (underwriter) offers the securities for sale. Official statement (OS): A document generally required for each new issue that contains informa- tion about the nature of the security being offered and the pledged sources of payment behind the security. Open-ended indenture: An indenture that allows for additional bond issues governed under the original indenture. Operating lease: A contract that allows for the use of an asset but does not convey rights of owner- ship of the asset. Operations and maintenance fund: A fund established in a revenue bond indenture that receives money to be used for meeting the costs of operating and maintaining the project. Order: A commitment made by a buyer to purchase a stated number of bonds at the offered price. Original issue discount: The discount from par at which an original offering is sold. Original issue proceeds: Proceeds of an issue calculated in accordance with Internal Revenue Code that considers the par amount of the bonds, accrued interest, any original issue premium, any original issue discount and fees for any qualifying guarantees or qualifying hedging transactions, and so forth. Overlapping debt: The proportionate share of debt in addition to a communityâs own direct obliga- tions, such as those issued by a county or school district in which it is located. P Par or par value: The principal amount of a security, generally the amount found on the face of the security. Par bond: A bond that is sold neither at a discount nor at a premium. Parity debt: Debt obligations with an equal claim to other debt obligations on the source of payment for debt service. Pay-as-you-go funding: Describes government funding of capital outlays from current revenues or grants rather than by borrowing. Paying agent: The institution chosen by the issuer to make principal and interest payments to bondholders. Personal property: Tangible, movable assets, such as automobiles, planes, and boats. Pledge: A promise to use targeted sources of revenue for the payment of debt service. A pledge dif- fers from a lien in that the targeted source is not readily available or identifiable (e.g., revenues from the project being financed by the bonds that has not yet been constructed).
40 Point: One percent (1%) of the face value of a bond. Preliminary official statement (POS): The draft of the official statement (without price, yield, or maturity information) that is used for the marketing of the bonds before issuance. Preliminary rating: A credit opinion from a rating agency based on a preliminary assessment. Premium: The amount by which the price of a bond exceeds the face value of the bond. Prepayment: Partial or full repurchase or other advance deposits of outstanding loan principal and interest by the borrower/debtor. The repurchase may be made at a discount from the current out- standing principal balance. Present value (PV): The value of future cash flows discounted to the present at a certain interest rate (such as the entityâs cost of capital or funds), assuming compounded interest. Principal amount: The face amount of a bond payable at maturity. Accrued interest is not a portion of this amount. Private activity bond (PAB): Can be defined as either of two things: (1) a bond of which more than 10% of the proceeds will be used for nongovernmental purposes and which is going to be repaid from revenues received from a private entity, or (2) a bond that will have the lesser of 5% or $5 million of the proceeds being used for loans to nongovernmental entities. Pro forma: A projection that includes expected costs and income from a proposed project. Proceeds: The money received by the issuer from the original delivery of an issue. The total proceeds include any variation of the price from par (discounts or premiums) and accrued interest. Project costs: All outlays expected to be associated with a project that are legally able to be included in the principal amount of the bond issue. These outlays may include the construction costs, equip- ment purchase or use, acquisition costs, capitalized interest expenses, reserve funding requirements, printing costs, legal fees, and the like. Project revenues: All rates, rents, fees, assessments, charges, and other receipts derived by a project sponsor from a project. PublicâPrivate partnership (P3): contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of a project. Public sale: Sale of an issue through a competitive bidding process in which the bidder offering to buy the issue at the lowest cost of funds to the issuer is awarded the bonds. Put bond: A bond that allows the bondholder to redeem the bond at a specific price either during a specified time period or on or after a specific date. The issuers of put bonds must have the means available to pay off the bonds should they be tendered. Q Qualified bid: A secondary market bid that is subject to conditions (i.e., an acceptable legal opinion). Qualified legal opinion: A conditional statement regarding the legality of securities. Quotation or quote: A market indication of the price at which a security can be bought or sold.
41 r Ramp-up phase: The phase in a projectâs life cycle immediately following construction. It is during this phase, the early years of operation, that a projectâs revenue stream is established. Rate covenant: A contractual agreement in the legal documentation of a bond issue requiring the issuer to charge rates or fees for the use of specified facilities or operations at least sufficient to achieve a stated minimum debt service coverage level. Rating: An evaluation made (for a fee) by rating agencies of the creditworthiness of an issue. Rating agency: An organization that assesses and issues opinions regarding the relative credit qual- ity of bond issues. The current Nationally Recognized Statistical Rating Organizations, as desig- nated by the Securities and Exchange Commission, can be located at www.SEC.gov. Real property: Tangible, nonmovable assets, such as land and buildings. Receivable: Amount owed to a lender by an individual, organization, or other entity to satisfy a debt or a claim. Examples of receivables generated by government activities include amounts due for taxes, loans, the sale of goods and services, fines, penalties, forfeitures, interest, and overpayments of salaries and benefits. Recourse: Rights of a holder in due course of a financial instrument (such as a loan) to force the endorser of the instrument to meet his or her legal obligations for making good on the payment of the instrument if dishonored by the maker or acceptor. Redemption: The retirement of outstanding bonds before maturity by means of a cash payment. Certain bonds are redeemable (âcallableâ) at a premium on certain dates. Refunding: A procedure whereby an issuer refinances outstanding bonds by issuing new bonds. There are generally two major reasons for refunding: to reduce the issuerâs interest costs or to remove a burdensome or restrictive covenant imposed by the terms of the bonds being refinanced. Reoffering price: The price at which the original purchasers of an issue offer the securities to investors. Revenue anticipation note (RAN): A short-term debt instrument the security pledge of which is the receipt of anticipated future revenues. Revenue bond: A bond that is payable from a specific source of revenue (typically from the facility for which the bond was originally issued) and that is not backed by a pledge of the full faith and credit of the issuer. Revolving loan fund: Financing tool that recycles funds by providing loans, receiving loan repay- ments, and then providing further loans. s Sale and leaseback: A transaction in which an issuer will purchase property and immediately lease the property back to the entity from which it was purchased for operation. The lease payments of the seller serve as the revenue required to pay debt service on the issue that allowed the issuer to purchase the property. Secondary market: The market in which securities are traded after they have been sold to the origi- nal investors. Secured debt: Debt for which collateral has been pledged.
42 Senior debt or senior lien bonds: Debt obligations having a priority claim on the source of payment for debt service. Serial bonds: Bonds that are scheduled to mature over a number of years (as distinct from term bonds). Settlement date: The day on which there is delivery and payment for a bond. Short term: Obligations that generally have a maturity of less than 1 year. Sinking fund: A fund into which funds are placed to be used to redeem securities in accordance with a redemption schedule in the bond contract. Special tax bond: A bond secured by revenues derived from one or more designated taxes other than ad valorem taxes. For example, bonds for a particular purpose might be supported by sales, cigarette, fuel, or business license taxes. Split ratings: Ratings assigned by more than one recognized rating service on a given issue or issuer that differ substantially from one another. Spread: (1) The discount (usually computed in basis points per bond) an underwriter receives for purchasing a bond issueâthe difference between what the underwriter pays for the issue and the resale price to the public; (2) the difference between the bid and offered price in the market for a security. Standby letter of credit: A letter of credit that provides for a single draw should the bonds be declared to be in default and therefore accelerated by the trustee involved. Start-up project: A separate, freestanding, and new facility dependent on its own revenue stream to generate earnings to cover operating and capital costs. State and local government series (SLGS): A type of U.S. Treasury security used by tax-exempt issuers to tailor the investment of bond proceeds to avoid earning excessive arbitrage. State infrastructure bank (SIB): A state or multistate revolving fund that provides loans, credit enhancement, and other forms of financial assistance to surface transportation projects. State transportation improvement program (STIP): A short-term transportation-planning docu- ment covering at least a 3-year period and updated at least every 2 years. The STIP includes a priority list of projects to be carried out in each of the 3 years. Projects included in the STIP must be consistent with the long-term transportation plan, must conform to regional air quality imple- mentation plans, and must be financially constrained (achievable within existing or reasonably anticipated funding sources). State transportation plan: The transportation plan covers a 20-year period and includes short- and long-term actions that develop and maintain an integrated, intermodal transportation system. The plan must conform to regional air quality implementation plans and be financially constrained. Subordinate claim: A claim on an underlying source of payment for debt service that is junior or secondary to that securing another debt obligation. (See also junior debt.) Subsidy cost: The estimated long-term cost to the federal government of providing credit assistance (e.g., direct loans or loan guarantees), calculated on a net present value basis at the time of dis- bursement and excluding administrative costs. Supplemental indenture: An agreement entered into by an issuer that supplements the issuerâs outstanding indenture or bond contract. Often, a supplemental indenture is executed in connection
43 with the issuance of one or more series of additional bonds under the master or bond contract. In some cases, a supplemental indenture amends terms of the master or bond contract without provid- ing for the issuance of additional bonds. Syndicate: A group of underwriters formed to purchase (underwrite) a new issue of municipal secu- rities from the issuer and offer it for resale to the general public. The syndicate is organized for the purposes of sharing the risks of underwriting the issue, obtaining sufficient capital to purchase an issue, and broadening the distribution channels of the issue to the investing public. T Take: To buy at the offered price. Tax and revenue anticipation notes (TRANs): Short-term debt that will be retired with taxes and other government revenues to be collected at a later date. Tax anticipation notes (TANs): Short-term debt that will be retired with taxes to be collected at a later date. Tax Reform Act of 1986: Legislation that produced profound changes in the municipal practice of issuing tax-exempt debt securities. Term bonds: Bonds that have a single maturity (as distinct from serial bonds). Title 23 of the United States Code: Highway title that includes many of the laws governing the federal aid highway program. The title embodies substantive provisions of law that Congress con- siders permanent and need not be reenacted in each new highway authorization act. Title 49 of the United States Code: Transportation title that includes laws governing various transportation-related programs and agencies, including the U.S. Department of Transportation, general and intermodal programs, interstate commerce, rail and motor vehicle programs, aviation programs, pipelines, and commercial space transportation. Tombstone: An advertisement of a new issue that states the basic information about the securities offering (principal amount and terms), the underwriters involved, and how an official statement may be obtained. (See also notice of sale.) Total bonded debt: A municipalityâs total general obligation debt outstanding. Total direct debt: A municipalityâs combined sum of total bonded debt and any unfunded debt. Transportation Infrastructure Finance and Innovation Act (TIFIA): A federal transportation credit program that provides direct federal loans, lines of credit, and loan guarantees through the U.S. Department of Transportation. True interest cost (TIC): The rate necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the new issue of bonds. Interest is assumed to be compounded semiannually. TIC computations produce a figure slightly dif- ferent from the ânet interest costâ (NIC) method because TIC considers the time value of money, whereas NIC does not. Trust indenture: The contract between bondholders and an issuer securing the prepayment of debt. It sets forth how all monies of issuers will be applied to operating costs, debt repayment, reserve funds, and construction funds. Trustee: The bank or trust company that serves both as the custodian of funds and the official repre- sentative of an issueâs securities holders.
44 Turnkey: A generic term for a variety of publicâprivate partnership arrangements, whereby a pub- lic sector entity awards a contract to one or more private firms to undertake the development, construction, or operation of an infrastructure project for a predetermined period of time before turning the project back over to the public entity. Turnkeys may take various forms, including designâbuildâtransfer and buildâoperateâtransfer. U Underwrite: To assume the liability of delivering to the issuer the expected proceeds of an issue by agreeing to buy the issue in its entirety. Underwriter: The dealer who buys the new issue of securities from the issuer and offers the bonds for sale to investors. Unlimited tax bonds: A bond payable from ad valorem taxes that are not limited by law in rate or amount. Unobligated balance: The portion of obligation authority (including new budget authority and bal- ances of unobligated budget authority carried over from prior years) that has not yet been obligated. With regard to the federal aid highway program, the term generally refers to balances of appor- tioned contract authority that the states have been unable to obligate because of annual obligation limitations imposed by Congress. Upgrade: An improved credit rating by a rating service. V Variable interest rates: Interest rates that change according to a formula set forth in the securities issue. Visible supply: The total dollar value of new securities expected to be offered over the next 30 days. Volume cap: The limitation on the aggregate annual amount of private activity bonds that may be issued in each state as stated in the Tax Reform Act of 1986 and subsequently amended. W Warrant: A debt security issued in certain jurisdictions that is often issued to pay project costs as they are incurred. y Yield: The annual rate of return on an investment, based on the purchase price of the investment, its coupon rate, and the length of time the investment is held. The yield of a municipal security moves inversely to the price. Yield curve: A graph that plots market yields on securities of equivalent quality but different maturi- ties at a given point in time. The vertical axis represents the yields, whereas the horizontal axis depicts time to maturity. The relationship of interest rates over time, as reflected by the yield curve, vary according to market conditions. Yield to average life: The yield resulting from the use of average maturity instead of the maturity date of the issue in the yield calculation. Yield to call: The yield derived when the sum of interest payments to the call date is used as the cash flow when the issue is redeemed at its call price.
45 Yield to maturity: The average annual percentage of return on a security assuming the interest is reinvested at the same yield and the security is held to maturity. Z Zero coupon bond: A bond that is originally issued at a deep discount from its par or face amount and that bears no current interest. The bond is bought at a discount price that implies a stated rate of return calculated on the basis of the bond being payable at par at maturity. The bond is redeem- able at its face value at maturity. (See also capital appreciation.)