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. Investing

    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. Investing

    The Basics Of Municipal Bonds

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

    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.
  4. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  5. Investing

    What Is A Municipal Bond?

    A municipal bond is a debt instrument used by a city, state, county or other local government authority to raise money for a project. Municipal bonds, often called munis, are considered a debt ...
  6. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  7. Investing

    Think Twice Before Buying Tax-Free Municipal Bonds

    Municipal bonds are relatively safe, tax-exempt securities--but they are not without drawbacks. Due diligence is required.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center