There are seven major classes of short-term muni obligations. These are used to provide immediate funding for a project to get construction underway until the cash stream to pay for the project starts flowing:

  1. Tax anticipation notes (TANs): Notes paid off with funds from a tax levy.

  2. Bond anticipation notes (BANs): Notes paid off with funds from a longer-term bond issue.

  3. Revenue anticipation notes (RANs): Notes paid off with funds from such sources as turnpike tolls or stadium ticket sales.



Look Out!
TANs, BANs and RANs generally have minimum denominations of $5,000 and maturities of less than one year. Repayment comes from funds available on or before the maturity date.

  1. Project notes: Provide money to undertake a project through some specific milestone - a certain number of highway miles or housing units completed - or to finance several smaller projects.

  2. Construction loan notes (CLNs): Fund construction of housing projects and are repaid by permanent financing provided from bond proceeds or some other pre-arranged commitment (often through Ginnie Mae, a federal bond-issuing agency discussed previously).

  3. Demand notes, or variable-rate demand obligations: Feature periodic interest rate adjustments and give the investor the right to tender the instrument to either the issuer or a designated party on a specified number of days' notice at a price equal to the face amount plus accrued interest.
    • The length of the notice period normally corresponds with the length of the period between interest rate adjustments: usually one, seven or 30 days.

    • Many variable-rate demand obligations also include a provision allowing the issuer (after properly notifying all holders and allowing them the opportunity to tender their holdings), to convert the obligation into a fixed-rate security with no demand feature.

    • Also known as "put" obligations for reasons to be discussed more fully in the section on derivatives.

  4. Tax-exempt commercial paper: Short-term, unsecured debt of states and municipalities.

    • Maturities usually range from 30 to 90 days but can go anywhere from three to 270 days. Since commercial paper issuers generally allow investors to choose from a span of maturities, some paper is maturing and must be replaced almost on a daily basis.

    • The frequent involvement of issuers and their agents in the market is costly, so municipalities do not issue commercial paper unless they are borrowing at least $25 million.

    • This churn also means that, although each particular issue is short-term, the constant replacement of paper means that long-term capital projects can be - and have been - financed this way without a formal GO or revenue bond ever being issued.

    • Denominations range between $50,000 and $5 million, with the securities typically sold in $1 million lots. Most commercial paper is purchased by money market funds.


Special Munis

Related Articles
  1. Managing Wealth

    Introduction To Commercial Paper

    Commercial paper is a short-term instrument that can be a viable alternative for retail fixed-income investors looking for a better rate of return on their money.
  2. Markets

    Commercial Paper

    Commercial paper is a short-term debt security issued by financial companies and large corporations. The corporation promises the buyer a return, or profit, for making the loan. The return is ...
  3. Retirement

    Money Market: Commercial Paper

    For many corporations, borrowing short-term money from banks is often a laborious and annoying task. The desire to avoid banks as much as possible has led to the widespread popularity of commercial ...
  4. Markets

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  5. Managing Wealth

    Retail Notes: A Simpler Alternative To Bond Funds

    These securities are meant to be held until maturity, removing the burden of complex pricing that sometimes plagues bonds.
  6. Markets

    The Differences Between Bills, Notes And Bonds

    Treasury bills, notes and bonds are all marketable securities sold by the U.S. government to pay off debts and to raise cash.
  7. Personal Finance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  8. Retirement

    Money Market vs. Short-Term Bonds: A Compare and Contrast Case Study

    Discover characteristics of money market and short-term bonds, including how the investments are alike and different, and the benefits and risks each offers.
  9. Managing Wealth

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  10. Personal Finance

    Weighing The Tax Benefits Of Municipal Securities

    Find out how to determine whether the tax exemption offered by "munis" benefits you.
Trading Center