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

    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. 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

    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.
  5. 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.
  6. Investing

    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.
  7. Taxes

    Weighing The Tax Benefits Of Municipal Securities

    Find out how to determine whether the tax exemption offered by "munis" benefits you.
  8. 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 ...
Frequently Asked Questions
  1. Where else can I save for retirement after I max out my Roth IRA?

    The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer ...
  2. How did George Soros "break the Bank of England"?

    In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually ...
  3. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ...
  4. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
Trading Center