What is 'Net Debt to Assessed Valuation'

Net debt to asset valuation measures a municipality’s net debt compared to the value of the real property purchased as assessed for tax purposes in a municipal bond issue. 

The lower a municipality's debt is relative to the assessed value of its property the less risky its bonds are deemed to be. There is less risk of the government being unable to finance repayment of the bond issue if they have low relative debt. A higher ratio could indicate that a sale of the underlying assets might be insufficient to pay the debt.

BREAKING DOWN 'Net Debt to Assessed Valuation'

Net debt to asset valuation is one of the factors used to determine the credit quality of a municipal bond issue. There are many types of municipal bonds, but the broadest categories are general obligation (GO) bonds and revenue bonds. GO bonds basis is from the credit of the issuing state or local government and their ability to tax. Revenue bonds usually are issued to fund specific projects and are repaid by particular taxes or by the revenue generated by the project.

Net debt shows a municipality's overall financial situation by subtracting the total value of the city's obligations and debts from the total value of its cash, cash equivalents, and other liquid assets, in a process called netting.

Calculation of Net Debt to Assessed Valuation

The net debt to assessed valuation formula is (short-term debt + long-term debt - cash and cash equivalents)/total estimated market value of property or assets.

For example, the city of Normal has 200 million in short-term debt, $200 million in long-term debt and $20 million in cash and cash equivalents. The market value of the city's real property such as buildings it owns, the parks and recreation lands, public utilities such as water and sewage services, and personal property like equipment and vehicles is $500 million.

According to the formula, city's net debt to estimated valuation is 0.76 ($200 mn + $200 mn - $20 mn)/$500 mn = 0.76).

Debt ratios in Municipal Bond Financing

Debt ratios are comparative statistics showing the relationship between the issuer’s outstanding debt and factors such as its tax base, income or population. These ratios are primarily useful when looking at GO bonds or other tax-supported debt.

Some of the more commonly used ratios in addition to net-overall debt to asset valuation include: 

  • The net-overall debt to estimated full valuation compares the net value of a municipal bond issue to the expected market value of the real estate secured by the debt.
  • net-overall debt per capita is the amount of an issuer’s debt outstanding divided by the population residing within the issuer’s jurisdiction. It indicates the issuer’s credit position because it compares the proportion of debt, borne per resident there, with that of residents in other jurisdictions.
  • The tax-supported debt to personal income would be comparing a state’s level of debt to the total personal income of its residents, which measures the state’s ability to repay its obligations because it indicates its ability to generate revenue.
  1. Debt Issue

    A debt issue is a financial obligation that allows the issuer ...
  2. Overlapping Debt

    Overlapping debt refers to the financial obligations of one political ...
  3. Underlying Debt

    Underlying debt is a municipal bond term that reflects an implicit ...
  4. Net Revenue Pledge

    A net revenue pledge requires the issuing municipality of a municipal ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its ...
  6. Debt Service

    Debt service is the cash that is required for a particular time ...
Related Articles
  1. Investing

    The Basics Of Municipal Bonds

    Investing in municipal bonds may offer a tax-free income stream, but such bonds are not without risks. Check out types of bonds and the risk factors of muni-bond.
  2. Investing

    What's a Debt Security?

    A debt security is a financial instrument issued by a company (usually a publicly traded corporation) and sold to an investor.
  3. Investing

    Municipal Bonds Vs. Money Market Funds

    Municipal bonds are a loan from you to a state or local government or authority; money market funds are a type of mutual fund.
  4. Financial Advisor

    How to Find the Best Bets in Muni Bonds

    Approach investing in municipal bonds the same as you would investing in stocks.
  5. Investing

    4 Tax-Free Muni Bond ETFs to Consider

    Tax free municipal bond ETFs are an excellent way to build wealth slowly. Here are 4 you should consider.
  6. Investing

    A Look at the Pros and Cons of Muni Bonds

    Considering muni bonds? Here's a look at their pros and cons.
  7. Investing

    Consider These Municipal Bond ETFs

    Though relatively low-risk, there are still some factors to consider when taking the plunge into municipal bond ETFs.
  8. Investing

    Debt Ratio

    The debt ratio divides a company’s total debt by its total assets to tell us how highly leveraged a company is—in other words, how much of its assets are financed by debt. The debt component ...
  9. Investing

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  1. What Is a Triple Tax-Free Municipal Bond?

    Learn how a triple tax-free municipal bond is like any corporate bond, but provides an additional incentive for investors ... Read Answer >>
  2. Where can I buy government bonds?

    The type of bond dictates its purchase. Federal bonds are issued by the federal government, while municipal bonds are issued ... Read Answer >>
  3. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center