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

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