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Glossary of Municipal Bond Terms

Glossary of Municipal Bond Terms

The following glossary of municipal bond industry terms and jargon was prepared for individual investors in tax-exempt securities by Zane B. Mann, publisher, California Municipal Bond Advisor.

Accrued interest. Coupon interest accumulated on a bond or note since the last interest payment or, for a new issue, from the dated date to the date of delivery. Since interest on municipal bonds is payable semi-annually, every six months, when you buy a bond in mid-term you are only entitled to the interest the bond earns after you buy it. The interest earned previously, the accrued interest, belongs to the seller. Some first-time bond buyers think this payment is a hidden charge or fee, not realizing that they will get it back in full at the next interest payment date as tax-free interest.Ad Valorem Tax. (It actually means “according to its value.”) A state or local government tax based on the value of real property as determined by the county tax assessor.

Advanced Refunded Bonds. A municipality may sell a second bond issue at a lower interest rate cost, placing the proceeds of the issue in an escrow account from which the first issue’s principal and interest will be repaid when due. See also ETM bonds.

AMBAC. AMBAC Indemnity Corp. The number two-ranked municipal bond insurance company.

Amortization of Debt. The annual reduction of principal through the use of serial bonds or term bonds with a sinking fund.

Arbitrage. The interest rate differential that exists when proceeds from a municipal bond – which is tax-free and carries a lower yield – are invested in taxable securities with a yield that is higher. The 1986 Tax Reform Act made this practice by municipalities illegal solely as a borrowing tactic, except under certain safe-harbor conditions..

Assessed Valuation. A municipality’s worth in dollars based on real estate and/or other property for the purpose of taxation, sometimes expressed as a percent of the full market value of the community.

Authority or Agency. A state or local unit of government created to perform a single activity or a limited group of functions and authorized by the state legislature to issue bonded debt.

Authorizing Ordinance. A law that when enacted allows the unit of government to sell a specific bond issue or finance a specific project.

Average life. The average length of time an issue of serial bonds and/or term bonds with mandatory sinking funds and/or estimated prepayments is expected to be outstanding. It also can be the average maturity of a bond portfolio.

Balloon Maturity. An inordinately large amount of bond principal maturing in any single year. Also called a Term Bond.

B.A.N. (Bond Anticipation Note). A short-term security, one year or less, used for interim financing to be repaid from the proceeds of a planned long-term bond issue.

Base Point (or Basis Point). One one-hundreth of one percent ( 1/100 % or 0.01 percent). Thus 25 basis points equal one-quarter of one percent, 100 basis points equal one percent. This is typical in-group, professional bond talk.

Bearer Bond. A bond that has no identification of the owner of the security. It is presumed to be owned by the bearer or the person who holds it. It was much sought after because of the ease of transferring or gifting. All bonds issued prior to June 1983 were bearer bonds; since then, they have been issued in Registered Bond form.

Bid. An offer to buy at a fixed price or yield. As opposed to Ask, which is an offering to sell.

Bond or note. A security whereby an issuer borrows money from an investor and agrees and promises, by written contract, to pay a fixed principal sum on a specified date ( maturity date) and at a specified rate of interest.

A Bond. A unit of debt, $1000 of principal or par amount. For 200 years municipal bonds were sold in $1000 denominations. Since the mid-1970s the minimum bond denomination has been $5000; nevertheless, “A Bond” is bought, sold, referred to and priced as if it were $1000.

Bond Counsel or Bond Approving Attorney. A lawyer who writes an opinion on the bond or note as to its tax exempt status and the authenticity of its issuance. In theory their opinion is meant to assure the bond investor, but they are paid by the issuer so it is not clear who their real client is.

Bond Fund (Tax-Exempt). A portfolio of municipal bonds sponsored by registered investment companies that offer shares to investors either through (1) closed-end funds or unit investment trusts, which offer shares of a fixed portfolio of municipal bonds; or (2) open-end or managed funds, which offer shares in a managed portfolio of municipal bonds whose size will vary as shares are purchased or redeemed.

Bond Insurance. Insurance issued by a private insurance company for either an entire issue or specific maturities that guarantees to pay principal and interest when due. This will provide a credit rating of triple-A and thus a lower borrowing cost for the issuer. The four largest monoline bond insurers are AMBAC, FGIC, FSA and MBIA, which see.

Bond Premium. The amount at which a bond or note is bought or sold above its par value or face value without including accrued interest.

Bonded debt. The portion of an issuer’s debt structure represented by outstanding bonds, sometimes limited by constitutional or legislative restraints.

Book Entry. A system of security ownership in which the ownership is held as a computer entry on the records of a central company for its owner. The bond owner gets a computer printout as proof of ownership.

Broker. Technically a broker is a bond trader in the secondary market buying from and selling to bond dealers. Its most common usage is as a description of a bond salesperson.

Callable bond. A bond or note that is subject to redemption at the option of the issuer prior to its stated maturity. The call date and call premium, if any, is stated in the offering statement or broker’s confirmation.

Certificates of Participation (COPs). A form of lease revenue bond that permits the investor to participate in a stream of lease payments, installment payments or loan payments relating to the acquisition or construction of specific equipment, land or facilities. In theory the certificate holder could foreclose on the equipment or facility financed in the event of default, but so far no investor has ended up owning a piece of a school house or a storm drainage system. A very popular financing device in California since Proposition 13 because COP issuance does not require voter approval. COPs are not viewed legally as “debt” because payment is tied to an annual appropriation by the government body. As a result, COPs are seen by investors as providing weaker security and often carry ratings that are a notch or two below an agency’s general obligation rating.

CFD. Community Facilities District. If a bond issue name has CFD in it you know it is a Mello-Roos Bond. The name refers to the taxing District that is set up to authorize the issuance of bonds, that will benefit from the financing, and from which special taxes will be collected for the bonds’ repayment.

Closed End Fund. A mutual fund of a fixed-dollar amount of issues traded on one of the exchanges not at its NAV, but priced based on perception and supply and demand. These funds can sell at a substantial discount or premium to their net asset value.

Conduit Bonds. Bonds whose repayment is the responsibility of the business or developer who benefits from the financing, rather than the issuer who only collects the taxes, fees or revenues and passes them on to the bondholder.

Coupon. The detachable part of a bond that evidences the rate of interest due and the interest payment date. In the good old days of bearer bonds, coupons were detached from the bonds and presented to the paying agent for payment just as one might cash a government check. Thus the reference to wealthy persons as “coupon clippers.”

Coupon rate. The specified annual interest rate payable to the bond or note holder as printed on the bond. This term is still used even though there are no coupon bonds anymore.

Covenant. A legally binding commitment by the issuer of municipal bonds to the bondholder. An impairment of a covenant can lead to a Technical Default.

Coverage. This is the margin of safety for payment of debt service on a revenue bond that reflects the number of times the actual and/or estimated project earnings or income for a 12-month period of time exceeds debt service that is payable.

Current Yield. The ratio of the coupon rate on a bond to the dollar purchase price expressed as a percentage. Thus if you pay par or 100 cents on the dollar for your bond and the coupon rate is 6%, the current yield is 6%; however, if you paid 97 for your 6% discount bond the current yield is 6.186%. ( .06 divided by 97). If you paid 102 for a 6% bond the current yield is 5.88% (.06 divided by 102).

Cushion Bonds. Bonds selling at a premium are called “cushion” bonds because they cushion the price volatility in an up and down market. By definition, a premium bond has a higher-than-market coupon interest rate. The dollar price movement of a high interest rate bond is less than that of a lower interest rate bond of the same maturity when general interest rates move up or down a few basis points.

Dated Date. (dtd.) The date carried on the face of a bond or note from which interest normally begins to accrue.

Dealer. A corporation or partnership that buys and sells and maintains an ongoing position in bonds and/or notes. They are also authorized to underwrite new issues. Some large commercial banks are licensed to act as bond dealers.

Debt Limited. The maximum statutory or constitutional amount of debt that the general obligation bond issuer can either issue or have outstanding at any time.

Debt Ratio. The ratio of the issuer’s general obligation debt to a measure of value, such as real property valuations, personal income, general fund resources, or population.

Debt Service. Required payments for principal and interest.

Debt Service Reserve Fund. A bank trustee account established by the trust indenture and used as a backup security for an issuer’s bonds. It usually amounts to one year’s debt service, and can be drawn on by the Trustee in the event of an impairment of the Trust indenture.

Default. Failure to pay in a timely manner principal and/or interest when due, or a Technical Default, the occurrence of an event as stipulated in the Indenture of Trust resulting in an abrogation of that agreement. A Technical Default can be a warning sign that a default on debt service is coming, but in reality actual debt service interruption does not always occur if the problems are resolved in time. A Technical Default will almost always drive down the price of a bond in secondary market trading.

Defeased bonds. Refunded bonds for which the payment of principal and interest has been assured through the structuring of a portfolio of government securities, the principal and interest on which will be sufficient to pay debt service on the refunded, outstanding bonds. When a bond issue is defeased, the claim on the revenues of the issuer is usually eliminated. See also ETM bonds

Delinquent Taxes. Property taxes that have been levied but remain unpaid on and after the due date. In California, December 10 and April 10. Special taxes and assessments are often due on these dates as well. When tax delinquencies exceed 5% the Bond Advisor places the issue on its internal Bond Watch.

Delivery. For bonds bought or sold in the secondary market, delivery – and payment – must be in three business days. For new issues, the time when payment is made to, and the executed bonds and notes are received from, the issuer. New-issue delivery takes place several weeks after the sale to allow the bonds and notes to be printed and signed.

Denomination. The face or par amount – nominally $1000 or $5000 but can be $100,000 or more in the case of a note – that the issuer promises to pay at a specific bond or note maturity.

Direct debt. In general obligation bond analysis, the amount of debt that a particular local unit of government has incurred in its own name or assumed through annexation.

Discount. The amount of dollars by which market value of a bond is less than par value or face value.

Discount Bonds. Bonds which sell at a dollar price below par in which case the yield would exceed the coupon rate. The difference between the discount price and the maturity price is subject to federal capital gains tax except in the case of Original Issue Discount Bonds, which see.

Discount note. Non-interest-bearing note sold at a discount and maturing at par. A U.S.Treasury Bill is a discount note.

Dollar Bond. Generally a term bond that is quoted and traded in dollars rather than in yield-to-maturity. They are well known issues of well known names in the market.

Double-barreled Bond. A bond with two distinct pledged sources of revenue, such as earmarked monies from a specific enterprise or aid payment, as well as the general obligation taxing powers of the issuer. A California GO Water Resources Bond would be a good example.

Escrow Fund. A fund that contains monies that only can be used to pay debt service.

ETM. Escrowed to Maturity. An Advanced Refunded bond. When interest rates fall, an issuer may chose to sell a new issue called a refunding issue and use the proceeds of the second issue to pay off the original issue, much the same as a home owner refinancing a mortgage in an effort to save interest costs. The proceeds of the refunding issue are used to structure a portfolio of U.S. government securities, the principal and interest payments of which exactly match the principal and interest payments of the refunded bonds. The portfolio is placed in escrow at the paying agent and the bond issue is said to be fully defeased and escrowed to maturity. In actual practice the bonds are usually called on the first call date. Because of the U.S. Treasury backing, ETM bonds are considered the safest municipal bonds available and trade on the market as a rich triple-A.

Feasibility Study. A financial study provide by the issuer of a revenue bond that estimates service needs, construction schedules, and most importantly, future project revenues and expenses used to determine the financial feasibility and creditworthiness of the project to be financed.

FGIC. Financial Guaranty Insurance Co. The number three-ranked municipal bond insurer.

Financial Advisor. Generally a bank, investment-banking company or independent consulting firm that advises the issuer on all financial matters pertaining to a proposed issue and is not part of the underwriting syndicate.

Fiscal Agent. Also known as the Paying Agent, the bank, designated by the issuer, to pay interest and principal to the bondholder.

Fiscal Year. A 12-month time horizon by which state and local governments annually budget their respective revenues and expenditures. Usually not the calendar year, January to December, but often July to June.

Flow of Funds. The annual legal sequence by which enterprise revenues are paid out for operating and maintenance costs, debt service, sinking fund payments, and so on.

FSA. Financial Security Assurance Inc. The number four-ranked municipal bond insurer.

Full Faith and Credit. The pledge of “the full faith and credit and taxing power without limitation as to rate or amount.” A phrase used primarily in conjunction with General Obligation bonds to convey the pledge of utilizing all taxing powers and resources, if necessary, to pay the bond holders.

General Obligation Bond. (G.O.) A bond secured by a pledge of the issuer’s taxing powers (limited or unlimited). More commonly the general obligation bonds of local governments are paid from ad valorem property taxes and other general revenues. Considered the most secure of all municipal debt. Limited in California by Proposition 13 to debt authorized by a vote of two thirds of voters in the case of local governments or a simple majority for state issuance.

General Property Tax. A tax levied on real estate and personal property.

Gross Debt. The sum total of a state’s or local government’s debt obligations.

Gross Revenues. Generally, all annual receipts of a revenue bond issuer prior to the payment of all expenses. Normally only Net Revenues are pledged to the repayment of bonds.

Indenture of Trust. A legal document describing in specific detail the terms and conditions of a bond offering, the rights of the bondholder, and the obligations of the issuer to the bondholder; such document is alternatively referred to as a bond resolution.

Industrial Development Bonds. (IDBs) also called Industrial Revenue Bonds (IRBs). Used to finance facilities for private enterprises, water and air pollution control, ports, airports, resource-recovery plants, and housing, among others. The bonds are backed by the credit of the private corporation borrower rather than by the credit of the issuer. Also known as Conduit Bonds. Private purpose bonds are limited by federal law to $50 times the state’s population on an annual basis.

Interim Borrowing. (1) Short-term loans to be repaid from general revenues or tax collections during the current fiscal year (TRANs or RANs); (2) short-term loans in anticipation of bond issuance or grant receipts (BANs).

Intermediate Range. Bonds maturing in 5 to 15 years.

Investment Banker. A firm engaged in raising capital for an issuer. Participates as the middleman in purchasing securities from the issuer and in selling the same securities to investors.

Issuer. A state or local unit of government that borrows money through the sale of bonds and/or notes.

Investment Grade. Bond issues that the three major bond rating agencies, Moody’s, Standard & Poor’s, and Fitch rate BBB or Baa or better. Many fiduciaries, trustees, some mutual fund managers can only invest in securities with an investment grade rating.

Junk Bonds. Most non-rated bonds and bonds rated below investment grade.

Joint Powers Authority (JPA). A JPA is formed when it is to the advantage of two or more public entities with common powers to consolidate their forces to acquire or construct a joint-use facility. Their bonding authority and taxing ability is the same as their powers as separate units.

Lease-Rental Bond. Bonds whose principal and interest are payable exclusively from rental payments from a lessee. Rental payments are often derived from earnings of an enterprise that may be operated by the lessee or the lessor. Rental payments may also be derived from taxes levied by the lessee. Also see Certificates of Participation.

Legal Opinion. A written opinion from bond counsel that an issue of bonds was duly authorized and issued. The opinion usually includes the statement, “interest received thereon is exempt from federal taxes and, in certain circumstances, from state and local taxes.”

Letter of Credit. A form of supplement or, in some cases, direct security for a municipal bond under which a commercial bank or private corporation guarantees payment on the bond under certain specified conditions.

Level Debt Service. Principal and interest payments that, together, represent more or less equal annual payments over the life of the loan. Principal may be serial maturities or sinking fund installments.

Lien. A claim on revenues, assessments or taxes made for a specific issue of bonds.

Limited Tax Bond. A bond secured by a pledge of a tax that is limited as to rate or amount.

Marks-Roos Bonds. The State Legislature enacted the Marks-Roos (named after its legislative sponsors) Local Bond Pooling Act of 1985 to facilitate the financing of local government facilities by bond bank pools funded by bond proceeds. The pool, formed under a Joint Powers Authority, can buy any type of legally issued debt instrument within or without its geographic area. The idea was to save money through economies of scale by selling one large bond issue to finance several small projects. This in fact has not always happened. Many issues were high yielding, unrated, junk bonds that benefited no one but the bond underwriter. Several Marks-Roos issues have defaulted and are under investigation by the Securities and Exchange Commission. Prospective investors should find out what sort of loans the pooled fund will make before buying such deals.

Maximum Annual Debt Service. The maximum amount of principal and interest due by a revenue bond issuer on its outstanding bonds in any future fiscal year. This is sometimes the amount to be maintained in the Debt Service Reserve Fund.

MBIA. MBIA Insurance Corp. The first-ranked municipal bond insurer, based on insurance in force and market penetration.

Mello-Roos Bonds. The Mello-Roos (named for its legislative sponsors) Community Facilities District Act of 1982 established another method whereby almost every municipal subdivision of the state may form a special, separate district to finance a long list of public facilities by the sale of bonds and finance certain public services on a pay-as-you-go basis. These Community Facilities Districts are formed and bond issues authorized by a two-thirds vote of the property owners in the district. Typically the only voters in a district are one or more real estate developers who own or have an option on all of the land in the district. These land-based financings were nicknamed “dirt bonds” by the Bond Advisor years ago. Bonds are sold to finance facilities that can include schools, parks, libraries, public utilities and other forms of infrastructure. The Districts may provide public services that include police and fire protection, recreation programs, area maintenance, library services, flood and storm drainage. Bonded debt service and/or the public services are paid for by special taxes levied on the real property within the district. As the developer subdivides and sells off the land the new property owner assumes the tax burden. Tax delinquencies can lead to fines and penalties and ultimately foreclosure and sale. The ultimate security for Mello-Roos bonds is the value of the real property being taxed, consequently a provision in the law requires the appraised value of the land be three times the bonded debt. Recent foreclosure sales have cast doubts on the skills of the appraisers, and underscore the riskiness of some of this debt when a severe real estate slump hits developers.

Mortgage Revenue Bond. A bond backed by a lien on the monthly payments of a large pool of mortgages, usually issued by a state or local housing authority.

Municipal Bond. Bonds issued by any of the 50 states, the territories and their subdivisions, counties, cities, towns, villages and school districts, agencies, such as authorities and special districts created by the states, and certain federally sponsored agencies such as local housing authorities. Historically, the interest paid on theses bonds has been exempt from federal income taxes and is generally exempt from state and local taxes in the state of issuance. There are approximately $1.3 trillion municipal bonds outstanding and they generate about $50 billion tax-free interest income each year.

Municipal Futures. A municipal index futures contract that has been traded at the Chicago Board of Trade since June 11, 1985. The futures contract is based on an index, known as The Bond Buyer Municipal Bond Index, composed of 40 bonds which are priced at the close of trading each day. This is no market for amateur speculators; it is used primarily by professional money managers to hedge their municipal portfolios.

Municipal Notes. Short-term municipal obligations, generally maturing in one year or less. The most common types are (1) bond anticipation notes (BANs), (2) revenue anticipation notes (RANs), (3) tax anticipation notes (TANs), (4) grant anticipation notes, (5) project notes, and (6) construction loan notes. Also see TRANs.

Municipal Securities Rulemaking Board (MSRB). An independent self-regulatory organization established by Congress in 1975 which is charged with primary rulemaking authority – under the SEC – over dealers, dealer banks, and brokers in municipal securities. Its board is stacked against individual investors and it is little more than a sweetheart union for the municipal bond industry.

Net Asset Value (NAV). The market value of all the bonds in a mutual fund portfolio divided by all the outstanding shares.

Net Bonded Debt. Gross general obligation debt less self-supporting general obligation debt, housing bonds, water revenue bonds, etc..

Net Interest Cost (NIC). Generally speaking, issuers award competitive bond sales to the underwriter bidding the lowest NIC. It represents the average coupon rate weighted to reflect the time until repayment of principal and adjusted for the premium or discount.

Net Revenue Available for Debt Service. Usually, gross operating revenues of an enterprise less operating and maintenance expenses but exclusive of depreciation and bond principal and interest. Net revenue as thus defined is used to determine coverage on revenue bond issues.

1915 Act, 1911 Act Bonds. The California name for Special Assessment bonds or Improvement Bonds, named, obviously, for the years in which the enabling legislature was approved. A special district is formed, public improvements (streets, curbs, gutters, water or sewer systems, etc.) are constructed, assessments are levied on all the properties in the district in proportion to the benefit derived from the improvement. Bonds are sold – without voter approval – and are repaid from the special assessments received. ’15 Acts are callable on any interest payment date and are usually dated on the 2nd of the month instead of the 1st or the 15th. ’11 Act bonds are payable from the assessments from one specific property and have a prior lien on that property in the event of default.

Official Statement (OS) or Offering Circular (OC). A document (prospectus) circulated for an issuer prior to a bond sale with salient facts regarding the proposed financing. There are two OSs, the first known as the preliminary, or “red herring” – so named not because it smells but because some of the type on its cover is printed in red – and it is supposed to be available to the investor before the sale. The final OS must be sent to the purchaser before delivery of the bonds.

Open-End Fund. This is the standard municipal bond fund. It has no fixed number of bonds in its portfolio. Rather it buys issues as investors buy shares in the fund, sells issues as investors redeem shares. The tax-free dividend is dependent on a pro-rata share of the interest earned, and this varies as the income of the portfolio varies. The fund managers guarantee to buy back shares at their Net Asset Value, the market value of all the bonds in their portfolio as determined at the close of each business day. This NAV per share can be more or less than the original purchase price. Open-end funds have no maturity date so ultimately they must be sold to return principal.

Original Issue Discount. Some maturities of a new bond issue that have an offering price substantially below par; the appreciation from the original price to par over the life of the bonds is treated as tax-exempt income and is not subject to capital gains tax. See also Zero Coupon Bond.

O.T.C. Over The Counter. The buying and selling method used in the secondary market for municipal bonds (and unlisted stocks). Not on an exchange.

Overlapping Debt. The proportionate share of the general obligation bonds of local governments located wholly or in part within the limits of the reporting unit of government that must be borne by property owners within the unit.

Par Value. The face value or principal amount of a bond, usually $5,000 due the holder at maturity. It has no relation to the market value. For pricing purposes it is considered 100.

Parity Bonds. Revenue bonds that have an equal lien on the revenues of the issuer.

Paying Agent. Also Fiscal Agent. Generally a bank that performs the function of paying interest and principal for the issuing body.

Premium. The amount, if any, by which the price exceeds the principal amount (par value) of a bond. Its current yield will be less than its coupon rate.

Price to Call. The yield of a bond priced to the first call date rather than maturity.

Primary Market. The new issue market

Principal. The face value of a bond, exclusive of interest.

Put Bond. A bond that can be redeemed on a date or dates prior to the stated maturity date by the bondholder. Also known as an option tender bond.

Qualified Legal Opinion. Conditional affirmation of the legal basis for the bond or note issue. The average investor should avoid any but the strongest opinion by the most recognized bond approving attorneys.

RANs. Revenue anticipation notes.

Rate Covenant. A legal commitment by a revenue bond issuer to maintain rates at levels to generate a specified debt-service coverage.

Ratings. Various alphabetical and numerical designations used by institutional investors, Wall Street underwriters, and commercial rating companies to give relative indications of bond and note creditworthiness. Standard & Poor’s and Fitch Investors Service Inc. use the same system, starting with their highest rating of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D for default. Moody’s Investors Services uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, and D . Each of the services use + or – or +1 to indicate half steps in between. The top four grades are considered Investment Grade Ratings

Red Herring. A preliminary offering statement, subject to final change and update upon completion of sale of bonds. The name comes not from the smell but from the red type along the side on the cover.

Redemption. Process of retiring existing bonds prior to maturity from excess earnings or proceeds of refunding bonds. It also refers to redeeming shares in a mutual fund by selling the shares back to the sponsor.

Redevelopment Agency (Redev.). A legislatively established subdivision of government established to revitalize blighted and economically depressed areas of a community and to promote economic growth. Tax Allocation Bonds are issued to pay the cost of land and building acquisition and their redevelopment and are repaid by the incremental increase in tax revenues produced by the increase assessed value of the area after redevelopment. Redev. Agencies may also sell Housing Mortgage Revenue Bonds to finance housing units within the area, a fixed percentage of which must be for low-cost housing.

Refunding Bond. The issuance of a new bond for the purpose of retiring an already outstanding bond issue.

Registered Bond. A non-negotiable instrument in the name of the holder either registered as to principal or as to principal and interest.

Repo. A financial transaction in which one party “purchases” securities (primarily U.S. Government bonds) for cash and simultaneously the other party agrees to “buy” them back at some future time according to specified terms. Municipal bond and note issuers have used repos to manage cash on a short term basis. (Known formally as repurchase agreements.)

Revenue Bond. A municipal bond whose debt service is payable solely from the revenues derived from operating the facilities acquired or constructed with the proceeds of the bonds.

Secondary Market. The trading market for outstanding bonds and notes. This is an O.T.C. market, a free form negotiated method of buying and selling, usually conducted by telephone or computer. Traders buy and sell for their own inventory. As many as $2 billion of issues trade each day.

Security. The legally available revenues and assets that are used to pay the bond holders. The key component that supports debt service.

Self Supporting Bonds. Bonds payable from the earnings of a municipal utility enterprise.

Serial Bond. A bond of an issue that features maturities every year, annually or semiannually over a period of years, as opposed to a Term Bond, which is a large block of bonds maturing in a single year.

Short term. Bonds or notes sold on an interim basis with tax-exempt securities for a period of from one to five years.

Sinking Fund. Money set aside on a periodic basis to retire term bonds at or prior to maturity.

Sinking Fund Schedule. A schedule of payments required under the original revenue bond resolutions to be placed each year into a special fund, called the sinking fund, and to be used for retiring a specified portion of a term bond issue prior to maturity.

Special Assessment Bond. A bond secured by a compulsory levy of special assessments, as opposed to property taxes, made by a local unit of government on certain properties to defray the cost of local improvements and/or services that represents the specific benefit to the property owner derived from the improvement. In California these are usually 1915 Act or 1911 Act Bonds.

Street Name. The registration of bonds in the name of a dealer or other third party instead of the owner, usually for custodial or safe keeping purposes. This also facilitates buying and selling from the account. The bond holder gets a monthly statement of the bonds in the account.

Super Sinker. A term maturity in a housing mortgage bond issue. These will be the first bonds to be called, on any interest payment date, from the proceeds of prepaid mortgages. The average mortgage is prepaid though refinancing or sale in 6.8 years. While it is likely, it cannot be guaranteed that a super sinker will be called; as a result they are priced as a long-term bond but are most likely to be a short-term maturity. It is a way to get a higher yield for a short term bond.

Swap. The exchange of one bond for another. Generally, the act of selling a bond to establish an income tax loss and replacing the bond with a new item of comparable value.

TAN. Tax Anticipation Note.

Tax Base. The total resource of the community that is legally available for taxation.

Taxable Equivalent Yield. The yield an investor would have to obtain on a taxable corporate or U.S. government bond to match the same after-tax yield on a municipal bond. This emuni.com site has a taxable equivalent yield table for California residents.

Tax Allocation Bond. Bonds issued in conjunction with a redevelopment project. The taxes pledged to their repayment come from the increase of assessed value over and above a pre-established base. The redevelopment creates this added value, known as the tax increment.

Tax-exempt Bond. Bonds exempt from federal income, state income, or state tax and local personal property taxes. This tax exemption results from the theory of reciprocal immunity: States do not tax instruments of the federal government and the federal government does not tax interest of securities of state and local governments.

Technical Default. Failure by the issuer to meet the requirements of a bond covenant. These defaults do not necessarily result in losses to the bond holder. The default may be cured by simple changes of policy or actions by the issuer.

Tender. The act of offering bonds to a sinking fund.

Term Bond. A large block of bonds of long maturity. They may be part of a serial Bond issue; there may be more than one term bond in an issue or a single maturity. Some are subject to a sinking fund redemption.

Territorial Bonds. Issued by Puerto Rico, the Virgin Islands, etc. Interest on this debt is exempt from state income taxes because of Congressional action that provides these territories with such benefits.

Thin Market. The scarcity of secondary market supply or few bid or offer quotes for a particular security.

Tombstone. An advertisement placed for information purposes, after bonds or notes are sold, that describes certain details of the issue and lists the managing underwriters and the members of the underwriting syndicate.

TRAN. Tax and Revenue Anticipation Note.

Trading Position. The holding of bonds in inventory by the dealer for purposes of buying or selling.

Trustee. A bank designated as the custodian of funds and official representative of bondholders. Trustees are appointed to insure compliance with the trust indenture and represents bondholders to enforce their contract with the issuer.

Underlying Debt. The general obligation bonds of smaller units of local government within a given issuer’s jurisdiction.

Underwriter. An agreement to purchase an issuer’s unsold securities at a set price, thereby guaranteeing the issuer proceeds and a fixed borrowing cost.

Unit Investment Trust (UIT). A mutual fund of a fixed number (20 to 30) of different issues in a portfolio placed in a trust. Units or shares are sold in the trust and each unit receives a proportionate amount of the tax-exempt interest earned by the bonds. As the bonds mature or are called, principal is returned to the investor. UITs, unlike other mutual funds, have a finite life.

Variable Rate Bond. A bond whose yield is not fixed but is adjusted periodically according to a prescribed formula.

Yield Curve. Graph depicting the relationship between yields and current maturity for securities with identical default risk.

Yield-to-call. Return available to call date taking into consideration the current value of the call premium, if any.

Yield-to-maturity. (YTM) Return available taking into account the interest rate, length of time to maturity, and price paid. It is assumed that the coupon reinvestment rate for the life of the bonds will be the same as the yield-to-maturity.

Zero-coupon Bonds. A deep discount municipal bond on which no current interest is paid. Instead, at bond maturity, the investor receives compounded interest at a specified rate. The difference between the discount price at purchase and the accreted value at maturity is not taxed as a capital gain but is considered tax-exempt interest. Widely used for college savings bonds.

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