Municipal Bond 101: Glossary of Terms

BASIS POINT – An amount equal to 1/100th  of 1 percent (i.e a 0.01 percentage point). So, for example, there is a 30-basis point difference in yield between a bond yielding 3.30 percent and a bond paying 3.00 percent.

BOND – A debt instrument issued for a year or longer, under which the bond holder typically receives periodic interest payments (coupons) and is repaid the bond principal on a specified date (maturity).

BONDHOLDER OR BONDOWNER – The person or entity having a legal ownership interest in a municipal bond.

CALL – To redeem a bond prior to its maturity, generally to refinance at a lower interest rate. To call a bond, the issuer generally pays the bond holder the face value of the bond plus, generally, some added premium. Under a “make-whole call,” the premium can be much higher, often calculated as the net present value (using then-current interest rates) of the payments that will not be made because of the call. Call provisions are relatively common for municipal bonds, but not for taxable bonds. If a taxable bond includes a call provision, it is generally a make-whole call.

CALLABLE BOND – A bond that includes a call provision.

COUPON – The periodic interest payments (generally twice yearly) made on a bond. The term is derived from the time when physical possession of a bond was proof of ownership and “coupons” attached to the bond entitled the bondholder to periodic interest payments when the coupons came due. Removing the coupon from the bond and presenting it for payment is called “coupon clipping.”

DIRECT  PAYMENT  BOND  – A municipal bond the interest on which is taxable, but for which the issuer receives a direct subsidy payment from the U.S. Treasury. The amount of the payment varies, but is

generally equal to a set percentage of the interest paid. For example, issuers of direct-payment Build America Bonds were to be paid an amount equal to 35 percent of the interest paid to bondholders. The payment rate is set by statute, not by contract, and can be reduced (see, sequestration).

EXEMPT FACILITY BOND – A private activity bond that is considered a qualified tax-exempt bond because it finances one of 15 specific facility types. While technically benefitting a private business (or private businesses), these exempt facilities generally serve a public function. These include: (1) airports, (2) docks and wharves, (3) mass commuting facilities,

(4) facilities for the furnishing of water, (5) sewage facilities, (6) solid waste disposal facilities, (7) qualified residential rental projects, (8) facilities for the local furnishing of electric energy or gas, (9) local district heating or cooling facilities, (10) qualified hazardous waste facilities, (11) high-speed intercity rail facilities, (12) environmental enhancements of hydroelectric generating facilities,

(13) qualified public educational facilities, (14) qualified green building and sustainable design projects, or (15) qualified highway or surface freight transfer facilities.

GENERAL OBLIGATION BOND – A municipal bond payable from general funds of the issuer. Most general obligation bonds are said to entail the full faith and credit of the issuer. Compare: “Revenue bond.”

ISSUE – A group of bonds sold on a contemporaneous (or nearly contemporaneous) basis in one or more series that are authorized under the same bond contract.

ISSUER – A state, territory, political subdivision, municipality, or governmental agency or authority that raises funds through the sale of municipal securities, such as bonds and notes.

MUNICIPAL BOND – A bond issued by a state or local government or governmental entity. Municipal bonds include tax-exempt bonds, private activity bonds, taxable municipal bonds, tax credit bonds, and direct payment bonds. Often the term “municipal bond” is used to refer to a tax-exempt bond.

NOTE – A short-term debt instrument for which the note holder is repaid principal and interest on a specified date. Notes generally mature in one year or less, but can be longer.

PRIVATE ACTIVITY BOND – A municipal bond the proceeds of which are used to finance activities benefitting nongovernmental persons. The Internal Revenue Code states that a “private activity bond” is taxable, unless it is a “qualified bond” (26 USC 103(b)(1)). In common parlance, however, the term “private activity bond” is often used to refer to a “qualified bond.” (See, qualified bond.)

QUALIFIED (PRIVATE ACTIVITY) BOND – A private activity bond the interest on which is tax-exempt, although such interest is generally is subject to the federal alternative minimum tax (AMT). A qualified bond is sometimes referred to as an AMT bond. A qualified bond may be: (A) an exempt facility bond, (B) a qualified mortgage bond, (C) a qualified veterans’ mortgage bond, (D) a qualified small issue bond, (E) a qualified student loan bond, (F) a qualified redevelopment bond, or (G) a qualified 501(c)(3) bond.

RECIPROCAL IMMUNITY – The principle that neither the states nor the federal government may tax income received from securities (bonds, notes, etc…) issued by the other. The doctrine dates to a series of U.S. Supreme court decisions in the 1800s and is the original basis for the exemption from the federal income tax of interest paid on municipal bonds (and notes).

REFUNDING – A procedure whereby an issuer refinances outstanding bonds by issuing new bonds. There are generally two major reasons for refunding: 1) to reduce the issuer’s interest costs or

2) to remove a burdensome or restrictive covenant imposed by the terms of the bonds being refinanced.

REVENUE BOND – A bond that is payable from a specific source of revenue. Pledged revenues may be derived from operation of the financed project, grants, or excise or other specified non-ad-valorem taxes. Generally, no voter approval is required prior to issuance of a revenue bond. Compare: “General obligation bond.”

REVENUE ANTICIPATION NOTE — Notes issued in anticipation of receiving revenues at a future date.

SERIAL BOND – The portion of a bond issue consisting of bonds with maturity dates that are staggered over a number of years, rather than a single maturity date for the entire issue (see term bond).

TAX CREDIT BOND – A municipal bond the interest on which is taxable, but holders of which receive some sort of income tax credit. The exact amount of the credit can vary. For example, the credit for certain tax credit bonds is set at the date of issuance by the

U.S. Department of Treasury to be equal to the amount of credit necessary to allow the bond to be issued with a price equal to its face amount.

TAXABLE MUNICIPAL BOND – A municipal bond the interest on which is subject to federal income tax. An issuer may issue a taxable bond because: it is financing activities that would not qualify for tax- exemption.

TAX-EXEMPT BOND – A municipal bond the interest on which is excluded from income for federal income tax purposes. Such interest may, or may not, be exempt from state or local taxation. Generally, municipal bond interest is exempt from tax because the bond is being used to finance a governmental activity, just as interest on federal bonds is exempt from state and local tax (See, reciprocal immunity).

TERM BONDS – Term bonds are bonds of an issue that mature on a single date, rather than over a series of dates.

YIELD – A measure of the annual rate of return on an investment. There are a variety of ways to calculate yield, but generally it is calculated based on the bond purchase price, the bond interest rate, and the length of time the investment is held.

Municipal Bonds for America (MBFA) is a non-partisan stakeholder coalition of municipal bond issuers, State and local government officials, and regional broker dealers working together to explain the many benefits of municipal bonds, highlighting the federal tax-exemption which enables financing of vital infrastructure projects at the lowest cost to residents while maintaining the integrity and value of the municipal bond market and providing the highest quality investments for municipal bond investors. 

February 22, 2017