:: BondUnderwriter.com - Tools

A tax-exempt bond, interest on which is subject to alternative minimum tax.

Bonds may be backed by municipal bond insurance specifically designed to reduce investment risk. In the unlikely event of default, an insurance company which guarantees payment will send you both interest and principal when they are due. However, given the current disruption in the insurance industry, investors should always look beyond the insurer for the underlying credit quality of the bond issuer and repayment source(s).

Many bond issues allow the issuer to call – or retire – all or a portion of the bonds at a premium, or at par, before maturity. When buying bonds, be sure to ask your broker about call provisions. Brokers will typically quote the yield to call and the yield to maturity when the yield to call is lower. This will generally occur when the bonds are priced at a price above the initial call price.

The issuer pays interest to investors in exchange for the use of the borrowed money. The coupon rate equals the interest rate and is a percentage of the principal, a accruing over a specified period. Interest on bonds with fixed interest rates typically is compounded and paid semiannually. Interest on bonds with variable interest rates accrues at a rate which changes periodically based on Specific criteria.

This is risk that the issuer is unable to pay scheduled principal and interest on a timely basis. To evaluate the credit quality of an issuer, review the preliminary official Statement of the offering which contains financial information of the issuer and request its credit rating and any other public disclosure information that may be available.

The annual return on the dollar amount paid for a bond.

A CUSIP is an identification number assigned to each maturity of an issue, similar to a serial number. The acronym CUSIP refers to Committee on Uniform Security Identification Procedures and nine-digit, alphanumeric CUSIP numbers that are used to identify securities, including municipal bonds. The first six characters are known as the base, or CUSIP-6, and uniquely identify the bond issuer. The 7th and 8th digit identify the exact bond issue and the 9th digit is an automatically generated “check digit.”.

The date of an issue from which interest on the issue usually starts to accrue, even though the issue may actually be delivered at some later date.

- see coupon rate

As interest rates rise, bond prices generally fall (and vice versa). This risk is usually pronounced for longer-term securities. While the interest payment (coupon rate) cannot change during the life of a fixed rate bond, the market price of the security changes as market conditions change. If you sell your municipal bonds prior to maturity, you will receive the current market price, which may be more or less than the price you paid. Consequently it is important to understand how the direction of interest rates might affect the value of your holdings. As with other fixed-income securities, municipal bond prices fluctuate in response to changing interest rates. Prices increase when interest rates decline and conversely, prices decline when interest rates rise.

A state, political subdivision, municipality, or governmental agency or authority that raises funds through the sale of municipal securities.

This is the date when the principal on the bond is scheduled to be repaid to the investor. Bonds typically range from 1 to 30 years. In general, the further out the maturity date, the higher the investment return (yield) to the investor.

Municipal securities sold during the initial distribution of the issue in a primary offering by the underwriter or underwriting syndicate. For purposes of MSRB rules, new issue municipal securities are municipal securities (other than commercial paper) that are sold by a broker-dealer during the issue’s underwriting period. All broker-dealers selling a new issue of municipal securities to customers or to other broker-dealers must meet certain requirements regarding delivery of official statements and certain other information. This obligation is not limited to broker-dealers acting as underwriters or selling group members.

The official statement, prepared by or on behalf of a municipal issuer in connection with a new issue of municipal securities, describes the essential terms of the bonds, including whether and on what terms the bonds can be redeemed prior to maturity, the sources pledged to repay the bonds, the issuer's covenants for the benefit of investors, and much more. In general, the terms of the bonds described in an official statement will include such features as, among many others:

the interest rate or, if the interest rate is variable, the manner in which such rate is determined;

the timing and manner of payment of the interest on and the principal of the bonds;

the minimum denomination in which the bonds may be sold;

whether the bonds can be redeemed by the issuer prior to maturity and, if so, on what terms;

whether the investor has the right to require the issuer to repurchase the bonds at their face value;

the sources from which the issuer has promised to make payment on the bonds (e.g., from its general taxing power, from a specific tax or revenue source, etc.);

whether any bond insurance, letter of credit or other guarantees have been provided for repayment; and;

the consequences of a payment or non-payment default by the issuer.

Unless the terms of the bonds have been modified after the bonds were issued, the official statement generally will provide the most detailed description of the terms and features of the bonds throughout the life of the bonds.

Financial and/or operating data about the issuer of the securities or any other parties who are responsible for repayment of the bonds is generally provided in the official statement, together with descriptions of any covenants of the issuer or other parties intended to protect the investor's financial interests. If the bonds are issued for the purpose of funding a specific revenue-generating project from which repayment of the bonds is to be made, the official statement generally will provide additional financial, operating or other information (e.g., feasibility studies, engineering reports, etc.) intended to assist an investor in determining whether the project is likely to generate sufficient revenues to make such payments. Financial and operating data contained in the official statement can become stale very quickly, no longer serving as reliable indicators of the then-current financial health or operating experience of the issuer with respect to most secondary market trading of the bonds. However, the financial and operating data provided in the official statement does serve as a basis for comparison for annual financial information provided by issuers and obligated persons under their continuing disclosure undertakings pursuant to Rule 15c2-12 of the Securities and Exchange Commission.

The official statement also typically includes summaries of the material terms of the relevant legal documents relating to the bonds, a copy of the legal opinion of bond counsel on the legality of the issue and the tax treatment of the bonds for federal Income Tax purposes, and (for insured bonds), a copy of the bond insurance policy.

Underwriters are required to submit to the MSRB copies of the official statement for virtually all new issues of municipal securities, which are made available on EMMA. Underwriters are also required to submit to the MSRB copies of any amendments to the official statement up until the 25th day after the settlement of the underwriting. However, there is no explicit obligation on the part of the issuer to update the official statement. Official statements for bond offerings generally speak only as of their date and are intended for use in connection with the initial distribution of the securities through the underwriters. Official statements generally are not intended to provide complete disclosure for bonds trading in the secondary market, although they continue to be valuable as the most comprehensive source for information on the specific terms of bonds.

100% of face value of a security.

A bond selling at its face value.

A preliminary version of the official statement, which is used to describe the proposed new issue of municipal securities prior to the determination of the interest rate(s) and offering price(s). The preliminary official statement may be used to gauge interest in an issue and is often relied upon by potential purchasers in making their investment decisions. Normally, offers for the sale of or acceptance of securities are not made on the basis of the preliminary official statement and a statement to that effect appears on the face of the document generally in red print, which gives the document its nickname, “red herring.”

The date a new issue is submitted to the MSRB’s EMMA site by the Issuer’s Underwriters.

The amount to be paid for a bond, usually expressed as a percentage of par value but also sometimes expressed as the yield that the purchaser will realize based on the dollar amount paid for the bond.

The market for new issues of municipal securities.

The face amount or par value of a security payable on the maturity date.

Most municipal bonds are rated by one of three major rating agencies: Moody’s Investor Service, Standard & Poor’s and Fitch Ratings. A credit rating is an independent assessment of the creditworthiness of the bonds. It measures the probability of timely repayment of principal and interest of a bond. Higher credit ratings indicate the rating agency’s view that there is a greater probability the investment will be repaid.

- are defined to include individuals as well as bank trust departments, investment advisors and money managers acting on behalf of individuals. Generally for orders up to $1 million.

"Retail Order Periods generally benefits retail customers because dealer compensation for such sales is typically in the form of an agreed upon takedown, which is negotiated and paid by the issuer rather than a mark-up paid by the customer"

- Municipal Securities Rulemaking Board, Requests Comment on Proposal Regarding Retail Order Periods 3/6/12

In order to make bonds available to individuals on a first priority basis, an early order period is established , also known as the Retail Order Period (ROP). There is no upfront brokerage fee/commission paid by investors during the underwriting period.

Now complete your Investor Profile to pre-qualify as a Retail Investor for pricing and order preferences during a Retail Order Period and get ready to buy bonds at the same low price as the largest institutions!

For purposes of MSRB rules and SEC Rule 15c2-12, the period during which an underwriting syndicate is considered to be engaged in the underwriting process. During this period, certain special underwriting rules apply. The underwriting period commences upon the earlier of the first submission to the syndicate of an order for the securities or the purchase of the new issue from the issuer. The underwriting period usually ends upon the later of the closing of the underwriting or the sale of the last of the securities by the syndicate. If the new issue is underwritten by a sole underwriter, the underwriting period is considered ended for purposes of MSRB rules by the later of the closing or the 21st calendar day after the date of the first submission of an order. However, in the case of municipal fund securities, sales generally are considered to be made in a continuous offering with a continuous underwriting period for purposes of MSRB rules and SEC Rule 15c2-12.

The annual rate of return on an investment, based on the purchase price of the investment, its coupon rate and the length of time the investment is held.

The total return you receive by holding a bond until it matures. It equals the interest you receive from the time you purchase the bond until it matures. It equals the interest you receive from the time you purchase the bond until maturity, plus any gain (if you purchased the bond below its par or face value) or loss (if you purchased it above its par value).

Tools

Glossary