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

    The Basics Of Municipal Bonds

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

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
  3. 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.
  4. Investing

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  5. 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.
  6. 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.
  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 ...
  9. 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.
Frequently Asked Questions
  1. Absolute P/E Ratio Vs. Relative P/E Ratio

    The difference between absolute P/E and relative P/E is easier when you know why each term is used.
  2. Why Do a Reverse Merger Instead of an IPO?

    Reverse mergers are often the most cost-efficient way for private companies to trade publicly.
  3. How Do Speculators Profit From Options?

    Options are a risky game, but you can learn speculators' tricks to use them to your advantage.
  4. What is the difference between a debenture and a bond?

    Debentures and bonds can both be used to raise capital, but debentures are typically issued to raise short-term capital.
Trading Center