Glossary (I - P)

An agreement executed by an issuer and a trustee (or fiscal agent) which pledges certain revenues and other property as security for the repayment of the Issue, sets forth the terms of the bonds and contains the responsibilities and duties of the trustee and the rights of the bondholders.

The responsibilities and duties of the trustee may include, among others, the following: (i) regulating the disbursement of proceeds of the issue for the intended purpose; (ii) fund transfers to assure that bondholders receive timely and complete payment; (iii) protecting the assets of the trust if a default occurs; and (iv) exercising a specified standard of care in the administration of those trusts. The rights of bondholders are set forth in indenture provisions relating to the timing of interest and principal payments, interest rate setting mechanisms (in the case of variable rate bonds), redemption provisions, events of default, remedies and the mailing of notices of various events. The indenture typically also contains the text to be printed on the bond.

A bond resolution differs from an indenture in that the issuer unilaterally adopts the resolution, which is then accepted as an agreement by the trustee or fiscal agent in a separate document. The provisions of a resolution used in this manner do not differ substantially from those of an indenture.

The term bond resolution is often also used to mean a resolution that authorizes the issuance of bonds, and may or may not also authorize the execution of an indenture.

General and Series Indentures are used when several issues of Parity Bonds are to be issued. The General Indenture customarily specifies the matters that will be common to all series of bonds and the Series Indenture is a Supplemental Indenture that specifies the terms of the particular series and any other features that are unique to that series.

A supplemental indenture is an indenture that amends or supplements a prior indenture, whether that prior indenture stands by itself, is a general indenture or a series indenture. See also "Principal Participants in a Debt Financing - Basic Legal Documents."

A very preliminary resolution of the governing body of an issuer confirming its then current intent to issue qualified private activity bonds for a specified project.

An inducement resolution is not legally binding on the issuer, but serves to mark the time under federal tax rules after which costs expended on the project qualify for financing with tax-exempt bonds.

The requirement to report to the Internal Revenue Service certain information about a new issue if interest on the issue is to be tax-exempt.

These reports must be filed on IRS Form 8038, 8038G, or 8038GC and must be submitted no later than the fifteenth day of the second month following the close of the calendar quarter in which the bonds are issued.

See Financing Lease.

See Financing Lease.

An intercept program is a program by which the bond documents permit the bond trustee to "intercept" revenues from a third party which would otherwise flow to the issuer in order to pay debt service on the bonds. The most common such program in California relates to Motor Vehicle License Fee revenues, which are normally collected by the State and distributed to cities and counties pursuant to a formula. Under Government Code Section 37351.5 (for cities) and Section 25350.55 (for counties), cities and counties can elect to have certain lease obligations (such as COPs or lease revenue bonds) secured by a pledge of motor vehicle license fee revenues. If the issuer then fails to make a lease payment when due, the trustee can notify the State Controller and obtain funds directly from the issuer's account within the State Motor Vehicle License Fee Fund to make the lease payment.

A charge paid to the bondholder by the issuer for the use or borrowing of money; the "interest rate" is the interest charge expressed as a percentage of principal (which generally corresponds roughly to the amount borrowed) accruing over a specified period (generally a year) so long as the debt remains unpaid.

Interest may be paid or may compound at intervals different from the period used to express the interest rate. For example, interest on current interest fixed rate bonds generally is expressed as an annual rate, but is paid semiannually, with each semiannual payment being one-half of the amount that would accrue over an entire year. Interest on compound interest fixed rate bonds generally is compounded semiannually and paid at maturity. Interest on variable rate bonds accrues at a rate which changes from time to time (perhaps as often as daily), but each such rate is nevertheless generally expressed as a percentage per year.

The amount of interest that has accrued over a period shorter than the payment or compounding interval may be determined by one of several different rules. For example, if interest accrues "on the basis of a 360-day year of 12 30-day months," the amount of interest that has accrued since the last payment or compounding date is calculated assuming that 1/12 of one year's interest accrues for each complete calendar month and 1/360 of one year's interest accrues for each additional day. On the other hand, if interest is calculated on the basis of a year of 365 days and the actual number of days elapsed, the amount of interest accrued since the last payment or compounding date is calculated assuming that 1/365 of one year's interest accrues each day.

Generally, interest on fixed rate bonds is calculated on the basis of a 360-day year and interest on variable rate bonds is calculated on the basis of a 365-day year.

An agreement, typically purchased by the trustee for an issue from a financial institution, in which the financial institution agrees to guarantee a certain investment return on moneys, often proceeds of the issue, invested under the agreement.

The return provided by the investment agreement may be fixed at a stated interest rate for each fund or account held by the trustee, or may "float" at a level related to the yield on the bonds (if the bonds bear interest at a variable rate) or some other index. Moneys that may be invested include a fund for the construction or acquisition of the project or the program loans to be financed, a reserve account, and a fund in which moneys to pay debt service on the issue are accumulated. An investment agreement is usually provided by a highly rated financial institution, in most instances a commercial bank or insurance company, because the credit rating on the bonds may be based in part on the credit rating (or the rating of the claims-paying ability) of the institution providing the investment agreement.

Investment agreements are sometimes used as a convenient means of managing the investment of moneys that are subject to arbitrage yield restriction or rebate.

The investment of proceeds and other moneys relating to an issue is typically governed by state law and by the indenture or bond resolution.

Either document may prescribe both the types of investments which may be purchased (e.g., U.S. Treasury obligations, bank certificates of deposit, or corporate obligations with a specified rating) and the maximum maturity of investments of certain funds (e.g., short term investments for moneys to be used to make the next debt service payment, longer term investments for reserves). The arbitrage rules under federal tax law may regulate the Yield at which proceeds may be invested and may require rebate of certain investment earnings.

See Proceeds.

Investors are persons or firms who purchase bonds. They are in effect loaning their money (the amount of their investment) to the issuer of the bonds in exchange for the issuer's obligation to repay them with interest. Investors are often thought of in two broad classes: institutional and retail.

An institutional investor is a mutual fund, insurance company, bank, or other financial institution which buys bonds, usually in very large blocks (sometimes in the tens of millions of dollars). Institutional investors have professional staffs for the purpose of analyzing credit risk, monitoring investments and managing the investor's assets.

A retail investor is an individual who purchases bonds, usually in small blocks (as small as $5,000). Retail investors range vary from the quite unsophisticated investor with a small amount of savings (often colloquially referred to as the "widows and orphans") to so called "high net worth" individuals who may have significant holdings and experience in the bond market.

See generally, "Principal Participants of a Debt Financing -- Roles and Responsibilities of Principal Participants -- Investors."

One or more bonds initially delivered by an issuer in a substantially simultaneous transaction and which are generally designated in a manner that distinguishes them from bonds of other issues.

Bonds of a single issue may vary in maturity, interest rate, redemption and other provisions. Under a revolving credit agreement or line of credit, obligations recorded or delivered representing the obligation to repay draws under the credit facility are commonly aggregated into a single issue.

For federal income tax purposes, the meaning of the term Issue may depend upon the context in which it is used and may differ from definitions used under state law or in bond documents. For example, bonds of different issuers sold at substantially the same time, payable from substantially the same source of funds, and sold pursuant to a common financing plan may be a single issue for certain federal tax purposes.

See "Principal Participants of a Debt Financing -- Roles and Responsibilities of Principal Participants -- Issuer."

An informational document setting forth the probable eligibility of the bonds for investment by certain potential investors in the specific jurisdictions covered by the survey (usually all 50 states, the District of Columbia and Puerto Rico).

A legal investment memorandum is used by underwriters in the marketing of bonds, especially to institutional investors. The investors included in the memorandum are commonly savings banks, trust funds and insurance companies. The legal investment memorandum is usually prepared by counsel to the underwriters, who reviews the current investment laws of the jurisdictions and summarizes the results of such review in the legal investment memorandum. The legal investment survey is usually circulated to appropriate dealers and investors with the Preliminary Official Statement and the preliminary Blue Sky Survey.

A loan agreement under which the nongovernmental borrower is a lending institution which agrees to relend the proceeds for purposes and under terms designed to achieve the public purpose for the issue.

See "Types of Financing Instruments -- Public Lease Revenue Bonds," and "-- Financing Leases and Certificates of Participation."

An arrangement with a bank which provides additional security that moneys will be available to pay debt service on an issue.

Customarily, a letter of credit is issued by a commercial bank directly to the trustee and is irrevocable until a specified date. The letter of credit entitles the trustee, if certain conditions are met, to draw upon the letter of credit by submitting to the bank a written request for payment (a "draft") and other carefully specified documents and certificates. If the documents submitted for the draw meet the requirements specified in the letter of credit, the bank must pay as provided in the letter of credit.

Letters of credit are also used as liquidity facilities in connection with obligations such as commercial paper or demand bonds. The trustee may draw upon the letter of credit if commercial paper has matured and not been "rolled over" by issuing new commercial paper, or if demand bond owners "put" them to the issuer, and the remarketing agent is unable to find new purchasers. See also Line of Credit.

A draw on a letter of credit results in an obligation by the "account party" on the letter of credit to reimburse the bank for the amount of the draw, plus interest if reimbursement is not immediate. The account party may be either the issuer or, in the case of a conduit financing, the nongovernmental borrower.

A letter of credit may be either a "direct pay letter of credit" or a "standby letter of credit." A direct pay letter of credit entitles the trustee to draw on the letter of credit for all debt service payments. Moneys that would otherwise be available to pay debt service are then used to reimburse the bank. Because payments of principal and interest are made from moneys of the bank rather than of the issuer, receipts by the owners of bonds are not subject to being reclaimed from the owners of bonds under the federal Bankruptcy Code.

In the case of a standby letter of credit, the trustee only draws on the letter of credit in the event moneys available to pay debt service are insufficient. In this type of financing, to assure that payments to owners of bonds are not subject to being reclaimed in a bankruptcy, moneys for debt service are typically required to be on deposit several months in advance of the date on which payments are made to the owners of bonds. These moneys are then "seasoned" for the period required to extinguish any potential claim to them in a bankruptcy.

See also "Principal Participants of a Debt Financing -- Roles and Responsibilities of Principal Participants -- Credit Enhancement Provider."

A line of credit is a contract between the issuer and a bank that provides a source of borrowed moneys to the issuer in the event that moneys available to pay debt service (e.g., on commercial paper) or to purchase a demand bond are insufficient for that purpose.

If a draw on a line of credit is necessary, the issuer notifies the bank and executes a note for the amount of the loan.

The bank extending the line of credit may refuse to make the loan if the issuer is involved in a bankruptcy proceeding and for certain other events, whereas a letter of credit is usually designed to be available even under these circumstances.

See also "Principal Participants of a Debt Financing -- Roles and Responsibilities of Principal Participants -- Credit Enhancement Provider."

The ease with which an investment may be converted to cash, either by selling it in the secondary market or by demanding its repurchase pursuant to a put or other prearranged agreement with the issuer or another party.

See Letter of Credit and Line of Credit.

An event which, if material, is required to be reported to the NRMSIRs and any state information depository pursuant to an undertaking to provide Continuing Disclosure pursuant to SEC Rule 15c2-12. See generally "Continuing Disclosure and Investor Relations."

An agreement under which the proceeds of a conduit financing are loaned to the nongovernmental borrower and the borrower agrees to pay to the issuer or the trustee the amounts necessary to pay debt service on the issue.

A loan agreement usually includes a set of covenants, financial tests and restrictive provisions governing the borrower and the project financed. See also Municipal Lease. See also "Principal Participants in a Debt Financing - Basic Legal Documents."

See Variable Rate.

See underwriter's gross spread and "Principal Participants of a Debt Financing - Roles and Responsibilities of Principal Participants - Underwriter/Placement Agent/Purchaser."

See "Principal Participants of a Debt Financing - Roles and Responsibilities of Principal Participants - Underwriter/Placement Agent/Purchaser."

Facts that a reasonably prudent investor would want to know in making the investment decision. See also Disclosure and Official Statement. See also "Continuing Disclosure and Investor Relations."

With respect to principal, to become due and payable pursuant to a bond's original terms (not by acceleration). See also Maturity.

With respect to a single bond, the date upon which the principal of the bond is stated to be due; with respect to an Issue, all of the bonds of an issue which are due on a single date.

For example, the bonds listed in the first line of the example under the definition of serial bonds have a maturity in the year 1988, whereas the entire issue has serial maturities in the years 1988 through 2000 and a term bond maturity in the year 2011. See also Term.

The Mello-Roos Community Facilities District Act of 1982. See "Types of Financing Instruments - Mello-Roos Bonds."

So called "Multi-Modal" bonds are bonds which can be converted to different interest rate modes at the option of the issuer (or in the case of conduit bonds, the borrower). Typically, multi-modal bond documents permit bonds to be remarketed in daily, weekly or monthly interest rate modes as variable rate tender option bonds and in term or fixed rate modes as well. Sometimes, "commercial paper mode" or flexible rate mode" is included to allow the bonds to be broken up into pieces which have different interest rate periods.

Municipal Securities Rulemaking Board (MSRB)

An independent, self-regulatory organization established by Congress in 1975 having general rulemaking authority over municipal securities market participants (generally, brokers and dealers).

The MSRB is required by federal law to propose and adopt rules in the areas including professional qualification standards, rules of fair practice, record keeping, the scope and frequency of compliance examinations, the form and content of municipal bond quotations, and sales to related portfolios during the underwriting period.

The 15 MSRB members include five from each of three categories - securities firms representatives, bank dealer representatives and public members. All market participants subject to MSRB jurisdiction are required to register with the SEC. Its jurisdiction does not extend to issuers of municipal securities. In recognition of the existing regulatory structure in place for banks and securities firms, the MSRB does not have inspection or enforcement authority.

A self-regulatory organization established as a "registered securities association" pursuant to the Securities Exchange Act of 1934, for the purpose of preventing fraudulent and manipulative acts and practices; promoting just and equitable principles of trade among over-the-counter brokers and dealers; and promoting rules of fair practice and self-discipline in the securities industry.

All securities firms (other than those dealing solely in government and federal agency securities) must be NASD members. The Securities and Exchange Commission holds certain residual powers over the activities of NASD. The NASD has very limited rulemaking authority with respect to municipal securities and is primarily responsible for enforcing members' compliance with Municipal Securities Rulemaking Board rules.

A sale of bonds, the terms and price of which are negotiated by the issuer through an exclusive agreement with a previously selected underwriter and/or underwriting syndicate.

Unlike a competitive sale, the underwriter is customarily active in all aspects of structuring the negotiated deal. Selection of the underwriter can be based on many different considerations including, but not limited to, expertise with a particular type of issue, market expertise, reputation, guaranties of maintaining a maximum gross spread as well as prior relationships with the issuer.

In addition to negotiating the terms and covenants of the issue, the issuer and the underwriter also negotiate pricing of the issue. One advantage of a negotiated sale is that the issue can be brought to market at the most advantageous time giving special consideration to a volatile interest rate environment for the particular issue. Negotiated sales are often used for complex financings which may require targeting to specialized investors due to the financing structure or the nature of the security for the bonds.

The underwriter's gross spread is generally larger on a negotiated sale than with a competitive sale, because it includes compensation for additional services, including analytical services, due diligence, structuring, and making markets in these securities after the issue has been completed (secondary market transactions).

With respect to any given issuer the amount of all outstanding debt of such issuer (direct debt), less the sum of any amounts accumulated in sinking funds for such debt and the amount of such debt that is self-supporting.

A measure of the interest cost of an issue derived by adding together all interest payments for the term of the issue and dividing that sum by the sum for all bonds of the amount of each bond multiplied by the number of years it is outstanding.

If the bonds are to be issued at a discount, the amount of the discount is added to the interest total as if it had been paid by the issuer. If the bonds are to be issued at a premium, that amount is subtracted from the interest total. The formula is as follows:

"Bond year dollars" measure the amount of bonds outstanding over the time they are outstanding. "Bond years" equal the number of bonds outstanding (in $1,000 denominations) multiplied by the number of years they are outstanding. One "bond year" is one $1,000 bond outstanding for one year. "Bond year dollars" are the number of bond years multiplied by $1,000 for each bond.

The NIC measure is distinguished from the True Interest Cost (TIC) in that the NIC does not take into account the time value of money.

Consider the following example of the NIC calculation. The NIC is computed for a $3,000,000 offering with three serial bond maturities and a fixed interest rate of 5% for each maturity.

The total interest payments come to $300,000. $50,000 is paid out for the first maturity, which is due in a year. $50,000 a year is paid out for two years on the second maturity, and for three years on the third maturity. The bonds were issued at par so there is no addition or deduction from the total interest payments for a discount or premium. Bond year dollars equal $6,000,000. The NIC equals 5%.

Because the interest rate was the same for all three issues and there was no Discount, the NIC was equal to the interest rate. A more complicated example will help make the calculation clearer. An issuer chooses to sell $10,000,000 of bonds in five separate maturities. The serial maturities and the interest rates follow. There are no discounts or premiums.

The total interest payments and bond year dollars follow, in order of maturity.

Had the issue been sold at a discount, the NIC would be higher. If the issue had sold at an average price of 97%, for example, the issuer would have had $300,000 less in proceeds. To compute the NIC, the $300,000 would be added to total interest payments. The NIC rises to 6.12%.

Note that in these examples, the NIC was a function only of the total amount of interest, and did not take into account the consideration of when the interest payments were made. In other words, all $1,781,000 of interest could have been paid in the first year and the NIC would have still equaled 5.238%.

The NIC is sometimes used to compare bids at a competitive sale. See also True Interest Cost (TIC).

With respect to any given issuer, the amount of such issuer's net direct debt plus such Issuer's share of the overlapping net direct debt of other public entities.

See Revenues.

A certificate signed on behalf of the issuer and dated as of and delivered at the closing to the effect that no litigation is pending that would adversely affect the financing.

If litigation is pending, it is customarily described in the no-litigation certificate and, presuming that the bonds are to be issued in spite of such litigation, the Issuer and the purchasers of the bonds must be able to conclude that the litigation does not present a material risk to the investors. One method of reaching that conclusion is to obtain, if available, an opinion of counsel to the effect that there is "no merit" to the adverse claims presented in the litigation.

See "Principal Participants of a Debt Financing - Roles and Responsibilities of Principal Participants - Nongovernmental Borrower."

The document that issuers use to solicit bids from prospective underwriters for a competitive sale of bonds.

The notice will commonly be published in a financial industry journal, usually The Bond Buyer or The Wall Street Journal (and, if required by law, a local newspaper of general circulation) and will list the details concerning an issue. This may include the date, time and place of the sale; the amount of the issue, maturity schedule and redemption provisions; legal authority for sale; the manner in which the bid is to be delivered; the type of security (general obligation, pledge of revenues, etc.); limitations on interest rates and interest payment dates; denominations and registration provisions (registered, book entry, etc.); names of bond counsel and any other attorneys delivering opinions, credit enhancement facilities, and other details.

The notice of sale, the winning bid and the issuer's acceptance of the winning bid together constitute an agreement for the purchase and sale of the issue in a competitive sale. See also "Principal Participants in a Debt Financing - Basic Legal Documents."

A Nationally Recognized Municipal Securities Information Repository. NRMSIRs are the repositories for all annual reports and event notices filed under SEC Rule 15c2-12. NRMSIRs are required to be approved by the MSRB. A list of all the currently approved NRMSIRs is contained in "Appendix B - Resources and Contacts." See "Continuing Disclosure and Investor Relations." See also State Information Depository.

Any person, including an issuer of municipal securities, who is either generally of through an enterprise, fund, or account of such person committed by contract or other arrangement to support payment of all, or part of the obligations on the municipal securities (other than providers of credit enhancement). See generally "Continuing Disclosure and Investor Relations."

A document containing information about the bonds being offered, the issuer, and the sources of repayment of the bonds.

Federal securities laws generally require that if an official statement is used to market an issue, it must fully disclose all facts that would be of interest ("material") to a potential buyer of bonds of the issue. For example, for a general obligation issue, the most important information may concern the financial health of the issuer, its tax base, and the economic health of the jurisdiction. For a water revenue issue, the most important information may be the financial health and physical condition of the water system enterprise, water supply and the economic health of the service area. For a conduit financing, the most important information may concern the financial health of the nongovernmental borrower. The materiality of such information may also depend upon whether or not credit enhancement is utilized. See also Deemed Final.

Under MSRB rules, a final official statement (which is printed only after the final terms of the bonds are available) must (if available) be delivered by the broker or dealer to purchasers of bonds no later than the settlement date of the transaction. An official statement may also be called an "offering circular," "offering memorandum" or "bond prospectus." See also "Principal Participants in a Debt Financing - Basic Legal Documents" and "Continuing Disclosure and Investor Relations."

The version of an official statement or offering circular used by the issuer or underwriters to inform the marketplace of the terms of the bonds being issued prior to receipt of bids at a competitive sale or prior to the determination of interest rates and purchase price in a negotiated sale.

The preliminary official statement is often referred to as the "red herring" because of the sentence, printed in red on the cover page, to the effect that the information contained in the official statement is subject to change and that there are conditions to the taking of orders by underwriters. Generally, however, few substantial changes are made between the preliminary official statement and the final official statement.

The statute under which a particular governmental entity is organized.

Generally, this term is used to describe an act which specifies that manner of organization and the powers of a single agency, authority or district named in the act, rather than the type of statute under which, for example, any city or county could cause to be created an agency of the type described in the statute. Compare, for example, the statute under which the California Housing Finance Agency is organized (Health and Safety Code Sections 50900 et seq.) with the statute under which a city or county may create a housing authority (Health and Safety Code Sections 34200 et seq.).

See Date of Issuance.

See Discount.

In general as used with respect to the principal of an issue, remaining unpaid.

However, the terms of indentures and bond resolutions often provide that bonds which are not yet paid but are the subject of a defeasance or an advance refunding are treated as no longer being outstanding.

With respect to any given issuer, debt of other public entities the jurisdictions of which overlap the jurisdiction of such issuer.

The issuer may partially overlap another public entity (e.g., a special district may contain parts of several counties), may be wholly within another public entity (e.g., a city is entirely within a county) or may wholly encompass another public entity (e.g., a county normally contains a number of cities).

The term may be used with respect to both general obligation debt payable from a d valorem taxes (in which case it is generally apportioned on the basis of relative assessed value), or may be used with respect to special assessment, special tax or other revenue based debt, in which case other methods of apportionment may be used, such as relative amounts of benefit or service delivered.

"Par" or "par value" refers to the principal amount of a bond.

A bond may be purchased (1) "at par," meaning the price of the bond is equal to its principal amount, (2) "below par," meaning the price is below its principal amount, or (3) "above par," meaning the price is above its principal amount. See also Discount and Premium.

Having equal security with other obligations.

For example, two issues of revenue bonds are said to be on a parity with each other if the revenues, projects, program loans and other assets securing the first issue also secure the second issue, and vice versa.

Issues may be on a parity with each other with respect to one level of security and not with respect to another level of security. For example, one of the issues in the above example may be the subject of bond insurance, while the other is not, in which case they would be on a parity with respect to the basic revenues, but not with respect to the insurance.

The institution (usually a commercial bank or trust company) appointed in the indenture or bond resolution to act as the agent of the issuer to pay principal and interest from moneys provided by or on behalf of the issuer. See also "Principal Participants of a Debt Financing - Roles and Responsibilities of Principal Participants - Trustee / Fiscal Agent / Paying Agent / Registrar / Authenticating Agent ."

See "Principal Participants of a Debt Financing - Roles and Responsibilities of Principal Participants - Underwriter/Placement Agent/Purchaser."

To grant a security interest in or lien on an asset to provide security for the repayment of bonds or the performance of some other obligation.

A pledge may cover an existing asset (such as a reserve account) or a stream of revenues to be received in the future (such as the income of a defined enterprise).

"Point" is a shorthand reference to 1%.

Because municipal dollar prices are quoted relative to $1,000, a point is worth $10 regardless of the actual denomination of a bond. Thus, a bond discounted 2 1/2 points, or $25, is quoted at 97-1/2% of its value, or $975 per $1,000.

A "basis point" is a shorthand reference to one one-hundredth of one percent (.01%). The term is generally used to describe interest rates rather than prices. For example, if an interest rate increases from 8.25% to 8.50%, the difference is referred to as a 25 basis point increase.

This term encompasses two different concepts, "pooled financings" (including both blind pools and dedicated pools) and composite issues.

The users of the proceeds of pooled financings may be public or private entities. Generally, the issuer (or the trustee on behalf of the issuer) holds the proceeds of the issue until they are loaned to users. The issue is typically secured by (i) the proceeds until expended, (ii) a reserve fund, and (iii) the loan agreements with the users. Because repayment of the bonds depends on the repayment of each loan, the creditworthiness and, therefore, the rating of the issue is based on the credit of the weakest user or borrower. Generally, the default of one borrower has no effect on the obligations of any other borrower; that is, no borrower is required to make up any payment not made by another borrower. To strengthen the credit of the issue which would otherwise be determined by the weakest credit, pooled financings commonly require either that each loan be insured or guaranteed or that the issue be secured by bond insurance or a letter of credit. As a result, the rating of the issue is based on the insurance company or bank rather than on the individual borrowers.

Local agencies may pool issues under the Marks-Roos Local Bond Pooling Act of 1985 (Government Code Sections 6584 et seq.).

Blind Pool Issue

An issue the proceeds of which are used to make or finance loans to, or projects for, entities which are not identified at the time the bonds are issued.

If some but not all of the users are identified, the pool is "partially blind."

Dedicated Pool

An issue the proceeds of which are to be used to finance loans to, or projects for, entities which are identified and committed to the financing at the time the bonds are issued.

See "Types of Financing Instruments - Marks-Roos Bonds" for a further discussion of pooled financings.

See Official Statement.

The amount by which the price of a bond exceeds its principal amount or par value.

A redemption premium is the premium an issuer is required (by the terms of a bond) to pay to redeem (call) the bond prior to its stated maturity.

See also Discount.

The determination (or redetermination) by the underwriters in a negotiated sale of the interest rates and reoffering prices at which an issue will be offered to investors.

Generally, the underwriters will have mailed a Preliminary Official Statement to potential investors and to other underwriters approximately one to two weeks prior to the pricing date. On the pricing date the underwriters will price the issue at the lowest marketable interest cost to the issuer. The price must be agreeable to the issuer. The underwriters then offer the bonds to investors on the agreed terms and if an appropriate number of orders are received, the issuer and the underwriters enter into a bond purchase contract on those terms. If not enough or too many orders are received on the original terms, the issue may be repriced to be more attractive to investors or to give a better rate to the issuer, as the case may be.

With respect to a loan, the amount loaned and to be repaid, i.e. the amount for the use of which interest is charged; similarly with respect to a bond, the amount on which interest accrues and which is to be paid to the bondholder on the maturity date (not including simple interest or compounded interest).

The principal of a bond is sometimes referred to as its "face amount" since the amount to be paid at maturity is printed on the front (the "face") of the bond. See also Original Issue Discount and Par Value.

See "General Federal Tax Requirements." In general, bonds of which (i) 10% or more of the proceeds are "used" in the trade or business of nongovernmental persons and 10% or more of the debt service is secured by or derived from property used in the trade or business of nongovernmental persons, or (ii) 5% or more of the proceeds are loaned to nongovernmental persons.

For this purpose, nongovernmental persons are treated as "users" of facilities which they lease and of facilities the output of which they agree to purchase. Nongovernmental persons may be treated as "users" of facilities by reason of long term management contracts. The United States government is treated as a nongovernmental person.

Interest on private activity bonds is tax-exempt only if they are qualified private activity bonds.

With the exception of qualified 501(c)(3) bonds and certain bonds for government owned seaports or airports, qualified private activity bonds must be exempt from that requirement under an exception for refunding bonds.

The offer and sale of an issue by the issuer directly to one or more investors, rather than through an underwriter.

Often, the terms of the issue are negotiated directly between the issuer and the investor. Sometimes, an investment banker will act as placement agent, bring the parties together and act as an intermediary in the negotiations. Instead of an Official Statement, an Offering Circular, Offering Memorandum or Private Placement Memorandum may be prepared.

A memorandum which takes the place of an official statement in a private placement and contains a description of the bonds, the financing structure and the issuer.

It is normally prepared in very small quantities for very limited distribution. It is not normally as extensive as with public offerings because the investor generally does its own investigation of the credit risk of the issue.

See "General Federal Tax Requirements." Proceeds are comprised of sale proceeds and investment proceeds. Sale proceeds are the amount paid by the ultimate purchasers (not including an underwriter) of a new issue, excluding any accrued interest.

The term gross proceeds refers to all of the moneys relating to an issue which are subject to arbitrage limitations and rebate under the Tax Code. Gross proceeds include sale proceeds, investment proceeds, and any other moneys pledged to pay debt service and expected to be used to pay debt service, including moneys in a sinking fund, moneys in a reserve account.

The term net proceeds refers to all proceeds less any investment proceeds earned after completion of the financed project.

An issue for the purpose of financing all or a portion of the costs of acquiring, constructing and/or renovating a specified project for a public or private entity.

Generally, the term is used in situations in which the issue is to be repaid with revenues relating to the project financed, although other revenues and guarantees may also secure the issue. See also Conduit Financing.

The sale of bonds (generally through an underwriter) to the general public (or a limited section of the general public).

The offer is usually disclosed by an official statement in which the terms of the financing and its structure are set forth, allowing the investor to make an informed decision about the merits of the proposed securities. The issuer may market a proposed public offering either via competitive sale or negotiated sale.

In addition to public offerings, bonds are also sold in limited public offerings and private placements.

See Competitive Sale.

See Demand Bond.