Glossary (Q - Z)

See "General Federal Tax Requirements."

See " General Federal Tax Requirements." Private Activity Bonds issued for certain nonprofit organizations (including hospitals and universities) described in Section 501(c)(3) of the Internal Revenue Code.

See also " Types of Financing Instruments - Conduit Revenue Bonds for Nongovernmental Borrowers  - Hospital/Health Care Conduit Facility Revenue Bonds and Educational Facility Conduit Revenue Bonds."

See "Principal Participants of a Debt Financing - Roles and Responsibilities of Principal Participants - Credit Rating Agencies."

See " General Federal Tax Requirements." To pay to the United States government (or in the case of certain qualified single family mortgage revenue bonds, to mortgagors) amounts earned from the investment of gross proceeds at a yield in excess of the yield on the issue.

Generally, the amount of this rebate requirement should be computed at least annually, and at least 90% of the cumulative rebate amount must be paid to the federal government every five years. Certain exceptions are provided (and no rebate of arbitrage need be paid), for example, if (i) all proceeds (other than certain debt service accounts and reserve accounts) are spent within six months or, with certain limitations, eighteen months or even two years, after the date of issuance, or (ii) the amounts are earned with respect to moneys in debt service funds that generate gross investment receipts of not more than $100,000 during the year.

The payment of principal of a bond, whether at maturity, or, under certain circumstances described in the bond, prior to maturity. Redemption of a bond by the issuer prior to maturity is sometimes referred to as calling the bond. Redemption prior to maturity may be "optional," "mandatory," or "extraordinary" (sometimes also called "special").

"Optional" redemption provisions give the issuer the option to redeem the bonds prior to maturity from any available funds of the issuer on certain specified dates at specified prices. A redemption price may consist of the principal amount plus a premium expressed as a percentage of the principal amount. Since a purchaser of a bond has made an investment decision based in part on the date the principal is to be repaid, the purchaser generally wants to know under what circumstances the bond may be redeemed prior to its maturity. There is often a minimum period of time during which the issuer may not optionally redeem the bond, giving the owner what is referred to as "call protection."

During a period after the call protection period, an issuer may be required to pay the owner a "premium" to redeem a bond prior to its maturity. The premium percentage generally decreases the longer the issuer waits to optionally redeem the bond. For example, the issuer might be required to pay 103% of the principal amount of the bond (100% of principal plus a premium of 3%) to optionally redeem the bond in the eleventh year after its issuance, 102% in the twelfth year, 101% in the thirteenth year, and 100% in the fourteenth year and each year thereafter until maturity.

"Mandatory" redemption provisions require the issuer to redeem all or a portion of an issue at certain times, or upon the occurrence or nonoccurrence of certain events. Generally, the issuer is not required to pay a premium for mandatory redemption and the risk of a mandatory redemption is taken into account by an investor when purchasing the bond. For example, single family mortgage revenue bonds are generally subject to mandatory redemption from proceeds not used to acquire mortgage loans and from prepayments of mortgage loans.

Another example is "mandatory sinking fund redemption," which requires the issuer to regularly redeem a portion of a term bond of an issue prior to its stated maturity in accordance with a schedule in the indenture or bond resolution. Mandatory sinking fund redemption results in the periodic retirement of the principal of term bonds in a manner similar to the periodic retirement of principal by the payment of serial bonds at maturity. For example, an issue might consist of $5,000,000 of term bonds maturing in 1999. Mandatory sinking fund redemption provisions for such bonds might require the issuer to redeem $1,000,000 of the term bonds in each of the years 1995 through 1999. In each of those years the issuer (or the trustee or fiscal agent) would choose $1,000,000 of the term bonds at random for repurchase.

"Extraordinary redemption" provisions allow the issuer to repurchase bonds prior to their maturity upon the occurrence of certain unforeseen and extraordinary circumstances, such as destruction of the facilities which were intended to generate revenues to pay the bonds. "Extraordinary redemption" is sometimes allowed to be made at the option of the issuer upon the occurrence of the extraordinary event, or may be required to be made upon such occurrence as an "extraordinary mandatory redemption." For example, the issuer may be permitted to rebuild the facilities with insurance proceeds or use the insurance proceeds to redeem bonds.

An issue of new bonds (the "refunding bonds") to pay Debt Service on a prior issue (the "refunded bonds").

Generally, the purpose of a refunding is either to reduce the debt service on the financing or to remove or replace a restrictive covenant imposed by the terms of the refunded bonds (for example, an excessive coverage ratio).

The proceeds of the refunding bonds are either deposited in escrow to pay the refunded bonds when subsequently due (see Advance Refunding) or applied immediately to the payment of the refunded bonds (see Current Refunding).

For accounting purposes, refunded bonds are not considered part of the issuer's outstanding debt because the refunded bonds are to be paid from the proceeds of the refunding bonds and not from the revenues originally pledged. Refunded bonds may continue to hold a lien on the revenues originally pledged, however, unless the indenture or bond resolution provides for defeasance of the refunded bonds prior to maturity or redemption.

Advance Refunding

A refunding in which the refunding bonds are issued more than 90 days prior to (in "advance" of) the date upon which the refunded bonds will be repaid. Compare to current refunding.

Typically, the proceeds of the refunding bonds are placed in escrow and invested in obligations of the federal government (although other investments such as federal agency obligations may be used). See also SLGS. Payments received on the investments held in escrow are then applied to make payments on the refunded bonds as they become due (including by redemption) or, in some cases, are applied to pay interest on the refunding bonds until also applied to pay principal of the refunded bonds.

Refunded bonds are considered "prerefunded" when the proceeds of the refunding bonds are placed in escrow and invested until a date upon which the refunded bonds may be redeemed. The escrow (including earnings thereon) is applied to the payment of interest, principal maturing prior to the redemption date and the redemption price of the refunded bonds.

Refunded bonds are considered "escrowed to maturity" when the proceeds of the refunding bonds are placed in escrow, invested and applied to payments on the refunded bonds when due, without redemption prior to maturity.

Generally, in an advance refunding, the revenues originally pledged to the payment of the refunded bonds become pledged to the payment of the refunding bonds on the date the refunding bonds are issued. Payment of the refunded bonds is then secured by the escrow. However, see Crossover Refunding.

Crossover Refunding

A refunding in which the revenues originally pledged to secure the refunded bonds continue to be applied to pay the refunded bonds until the refunded bonds mature or are redeemed.

On the date the refunded bonds are paid in full, the pledged revenues "cross over" and are thereafter pledged to pay the refunding bonds.

During the period when both the refunded and the refunding bonds are outstanding, the escrow containing the proceeds of the refunding bonds pays interest on the refunding bonds. Then on the crossover date, the escrow pays the principal of the refunded bonds.

Current Refunding

A refunding in which refunding bonds are issued not more than 90 days before the date upon which the refunded bonds will be paid.

Generally, the proceeds of the refunding bonds are applied immediately to pay the refunded bonds. Thereafter, the revenues originally pledged to the payment of the refunded bonds are pledged to the payment of the refunding bonds.

A bond for which the name and address of the legal owner is required to be listed on the bond registration books of the trustee or a registrar.

Generally, interest payments on a registered bond are made by check or wire sent to the registered owner. The registered owner may not be the beneficial owner of the bond, but rather a nominee for the beneficial owner. If the registered owner is a broker/dealer acting as nominee for a client, the bond is referred to as being held in "street name." Registered bonds are often held in the name of a securities depository or in the name of a nominee for a securities depository, such as Depository Trust Company, which then keeps a record of the broker/dealers whose clients are the beneficial owners of the bonds. Compare to Coupon Bond.

The agent of the issuer appointed to maintain a list of the names and addresses of all registered owners of the bonds and to record transfers and exchanges of the bonds.

See also " Principal Participants of a Debt Financing - Roles and Responsibilities of Principal Participants - Trustee/Fiscal Agent/Paying Agent/Registrar/ Authenticating Agent."

See "General Federal Tax Requirements."

To buy and resell to the public previously-issued bonds that have been or are required to be purchased from the original or subsequent holders of the bonds by the issuer or another party upon the occurrence of certain events specified in the legal documents.

With respect to variable rate bonds, remarketings commonly occur in connection with (i) a tender of the bonds at the option of the holder, (ii) the conversion from one interest rate mode (e.g., weekly variation) to another interest rate mode (e.g., quarterly variation), (iii) the conversion of the variable rate bonds to fixed rate bonds, or (iv) the termination or other alteration of the Letter Of Credit, Standby Purchase Agreement or other Credit Enhancement facility or liquidity facility. With respect to an issue the proceeds of which were escrowed upon closing, a remarketing would occur upon satisfaction of the requirements for breaking the escrow and disbursing the proceeds for the purposes for which the bonds were issued.

In a remarketing, bonds tendered by their holders (perhaps mandatorily) for purchase are sold to new purchasers. A remarketing is usually conducted on behalf of the issuer by an investment bank or commercial bank acting as remarketing agent pursuant to a remarketing agreement entered into at the time of the original issuance of the bonds. Frequently, the remarketing agent is the same firm that acted as the managing underwriter for the original issue.

In many instances, including a conversion to fixed rate or the breaking of escrow, a remarketing will resemble a new issue in many respects, including the preparation and distribution of a new official statement, often called a "reoffering circular." Unlike a new issue, however, the proceeds of remarketing do not go to the issuer. Rather, remarketing proceeds are used to pay the purchase price of the tendered bonds to the previous owners or to reimburse the credit facility provider for draws made on the credit facility for such purchase.

The investment bank or commercial bank retained to remarket bonds that have been tendered for purchase by the issuer or another party pursuant to an option to sell (a "put") that accompanies the bond.

See also Remarket, Demand Bond and Variable Rate.

Literally, offering again.

This term is used in two contexts. First, it is used to describe the offering of bonds by the underwriter to the public. For example, the "initial offering price to the public" is often referred to in shorthand as the "reoffering price." Second, the term "reoffering" is used to describe a form of remarketing in which an issuer exercises the right to require bondholders to mandatorily tender their bonds for reoffering to the public, customarily in the context of a conversion from a variable rate to a fixed rate.

See "Principal Participants of a Debt Financing - Using a Request for Proposal to Select Financing Team Members."

See Pricing.

An account from which moneys may be drawn to pay debt service on an issue if pledged revenues and other amounts available to satisfy debt service are temporarily insufficient.

A reserve account may be funded to its agreed requirement with bond proceeds, or it may be only partly funded at the time of issuance and expected to reach its full requirement over time through the accumulation of pledged revenues or other available moneys. If a bond reserve account is used in whole or part to pay debt service, the issuer usually is required to replenish the reserve account from revenues available after payment of debt service.

A typical reserve requirement for an enterprise revenue bond would be an amount equal to maximum annual debt service on the issue, but not more than 10% of the original principal amount of the issue.

The size of the reserve account and the investment of the moneys held therein are subject to restrictions contained in the federal tax law for tax-exempt bonds. Investment earnings on bond reserve account moneys may also be subject to yield restriction and rebate.

Sometimes, reserve account requirements are satisfied by the provision of a Surety Policy instead of a deposit of cash. See Surety Policy.

The income produced by a given source.

In the context of revenue bonds, revenues typically means the income and receipts generated from the operation of the project or loan program being financed, or from the enterprise of which the project or loan program is a part or from other nontax sources (for example, water charges in the case of water revenue bonds, lease payments in the case of lease revenue bonds or loan repayments in the case of mortgage revenue bonds or a conduit financing). Such revenues would normally be pledged to the payment of the revenue bonds.

Gross revenues refers to the total receipts derived from the operation of the project, program or enterprise. Net revenues refers to the amount available after subtracting certain costs and expenses, most commonly for operation and maintenance, from gross revenues.

A name sometimes used to describe the exclusive procedure under the California law for an interested person to challenge the legality of a bond financing. The validation statutes provide that if the issuer does not file a validation action concerning the financing, then any interested person may file an action within 60 days form when the financing is approved - a so-called "reverse" validation action. Once an interested person files a reverse validation action, the case proceeds in a manner similar to a validation action by the issuer.

The filing of information with the Securities and Exchange Commission in accordance with the Securities Act of 1933 as a prerequisite to selling or marketing the securities.

Most bonds issued by or on behalf of state or local governmental entities are exempt from such registration requirements.

A rule promulgated by the Securities Exchange Commission under the Securities Exchange Act of 1934 concerning disclosure and continuing disclosure requirements for municipal securities. The full text of SEC Rule 15c2-12 is contained in "Appendix D - Legal References - Federal Securities Laws." See also "Continuing Disclosure and Investor Relations."

The market in which bonds are purchased from bondholders who have held such bonds for investment purposes, as opposed to being purchased directly from the issuer or from the issuer through an underwriter.

The features of a debt instrument designed to reduce the risk of nonpayment or late payment, including the sources of moneys for timely payment.

For example, a pledge of revenues that restricts the use of the revenues solely to payment of operating expenses of an enterprise and debt service on bonds issued to finance that enterprise provides security for the repayment of those bonds. Similarly, credit enhancement also provides additional security.

A financing in which the proceeds of the issue are deposited in an insurance reserve fund which is used to pay liability claims against participating entities as such claims arise.

The fund is invested and, depending upon the investment earnings and the claims paid, may require additional deposits from participating entities.

Typically, an entity separate from the participating entities, such as a joint powers authority, is the issuer of the bonds and is responsible for the administration of the insurance reserve fund, including the investment of the fund and the payment of claims (although a separate entity may administer these functions through a contractual arrangement with the issuer). Insurance is provided to participating entities (which may be cities, counties and other public entities) which pay premiums for the coverage. The premiums paid by the participating entities constitute the revenue source for the repayment of the issue.

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

Bonds of an issue which are payable as to principal in amounts due at successive regular intervals, generally annual or semiannual and generally in the early years of the term of the issue. An issue may consist of both serial bonds and term bonds.

For example, an issue in the total principal amount of $4,000,000 might consist of serial bonds maturing in the years 1988 through 2000 and $2,595,000 of term bonds maturing in 2011 (but subject to mandatory sinking fund redemption in the years 2001 through 2010) as follows:

Payments made by an issuer (often into a sinking fund) to provide for the redemption or payment at maturity of term bonds. Also called "mandatory sinking account payments" or "sinking fund installments."

Generally, sinking fund payments are mandatory in a specified amount for each payment period to provide for the periodic redemption of term bonds prior to their final maturity. See the example under serial bonds. The individual term bonds to be redeemed each year are customarily selected at random by the trustee.

An acronym (pronounced "slugs") for a type of United States Treasury obligation, the complete name of which is United States Treasury Securities - State and Local Government Series.

SLGS are an investment vehicle made available by the United States Bureau of Public Debt for investment of gross proceeds. The Bureau of Public Debt offers three types of SLGS which are commonly referred to as "Demand Deposit SLGS," "Time Deposit SLGS" and "Zero SLGS." Generally, Time Deposit SLGS are acquired in connection with an advance refunding. The SLGS are held in escrow and principal and interest received on the SLGS are used to pay debt service on the prior issue. Because the issuer can specify the rate (subject to the maximum rate specified in a weekly schedule) earned on the SLGS, the issuer may design the escrow investment to meet any yield restrictions while maximizing its permitted investment return. Demand Deposit SLGS are intended for the investment of moneys subject to the rebate requirements. Earnings on Demand Deposit SLGS are not subject to the rebate requirement. The interest rate on the Demand Deposit SLGS is determined weekly, effective each Monday and is calculated based upon a formula which takes into account the Federal Funds Rate which is published by the Federal Reserve Board and an estimated average marginal tax rate of owners of short-term municipal securities and an administrative fee. The estimated marginal tax rate and the administrative fee may be changed periodically by the Bureau of Public Debt. Zero SLGS bear interest at zero percent, have flexible purchase and redemption terms, and are designed to be used to average down investment yields on open market securities for yield restriction purposes.

A law firm retained by the Issuer to render the opinion that interest on an issue is tax-exempt under circumstances where the firm retained as bond counsel either does not have the expertise or is otherwise unable to render that opinion.

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

An agreement between an issuer and a financial institution, usually a bank, whereby the bank agrees to purchase bonds in the event the bondholders tender them to the issuer and they are not remarketed to new purchasers.

See also Demand Bonds and compare to Letter of Credit and Line of Credit.

An information depository for a particular state approved by the MSRB in accordance with SEC Rule 15c2-12. Currently, there is no State Information Depository for California. See generally "Disclosure and Continuing Disclosure."

In the public finance context, a surety policy is a form of insurance provided by a bond insurer to satisfy a reserve fund requirement for a bond issue. Under this arrangement, instead of depositing cash in a reserve fund, the issuer buys a surety policy by paying a one-time premium equal to some percentage of the face amount of the policy. If the reserve fund is needed to make a debt service payment, the trustee notifies the surety provider and the provider makes the payment, up to the face amount of the policy. The issuer then has an obligation to reimburse the provider for the payment, plus interest.

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

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

See "Types of Financing Instruments - Tax Allocation and Other Redevelopment Bonds."

The Internal Revenue Code of 1986, as amended. See also Treasury Regulations.

See "General Federal Tax Requirements" . The published notice, public hearing and approval by elected officials required by Section 147(f) of the Internal Revenue Code for qualified private activity bonds; originally enacted in the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA").

See "General Federal Tax Requirements" . The periods during which the federal tax rules relating to arbitrage yield restriction permit certain gross proceeds of an issue to be invested at a yield that is materially higher than the yield on the issue.

The most important of these is the temporary period generally available for the investment of moneys in construction funds or loan acquisition funds after the date the governmental obligations are issued. In addition, a thirteen-month temporary period is provided for moneys in certain debt service funds (generally including funds used primarily to achieve a proper matching of revenues and debt service within each year).

10b5 Standard refers to the formulation of the anti-fraud rule in securities law contained in SEC Rule 10b-5. See "Appendix D - Legal References - Federal Securities Laws." The language of the 10b5 Standard is often contained in legal opinions or closing certificates. It is generally required that an issuer and/or a nongovernmental borrower certify that the descriptions of their financial condition and operations contained in an Official Statement meet the 10b5 Standard as a part of the closing documentation, as well as in connection with the execution of a Bond Purchase Agreement. See generally "Continuing Disclosure and Investor Relations."

The process by which a potential purchaser of bonds (which may be the issuer of the bonds) solicits from the holders of such bonds offers to sell those bonds to the purchaser upon the terms specified in the solicitation.

This technique borrows its name from the corporate securities arena, where shares in a company may be acquired by the purchase of common stock on the open market pursuant to a tender offer. In the context of public finance, a tender offer may be a refinancing method in which an issuer distributes, by publication or otherwise, to the owners of its bonds an offer either (i) to purchase a specific aggregate amount of such bonds at a specific price if such bonds are tendered by a specified date, or (ii) to utilize a stated amount of money to purchase the bonds by accepting tenders of the bonds in order of price until the stated amount is exhausted. Bonds purchased by an issuer pursuant to a tender offer are usually deemed retired and no longer outstanding under the indenture or bond resolution.

While an issuer may utilize the tender offer technique to reduce its outstanding debt by use of excess cash on hand, it is more commonly used as an alternative to an advance refunding. In such a case, a new issue might be issued subsequent to or concurrently with the tender offer to provide the moneys with which to purchase tendered bonds.

See Demand Bond.

With respect to a single bond, the period of time until the maturity date of the bond; with respect to an issue, the period until the maturity date of the last bond of the issue to mature.

Originally, the maturity due at the end of the term of an issue; now, more commonly, a maturity that is subject to redemption over a specified period from sinking fund payments.

See also Redemption and Sinking Fund Payments.

A colloquial term used to refer to a portion of financing for a project or program. Sometimes used to describe a series of bonds ( i.e. "The Series 1998 bonds represent the first tranche of financing for the airport expansion project.") Derived from the French, the term originally meant a series of bonds issued for sale in a foreign country.

The federal income tax regulations adopted by the United States Department of Treasury. Treasury Regulations are designed to provide additional detail and interpretation of the Tax Code.

A measure of the interest cost of an issue that accounts for the time value of money.

The obligation to pay a dollar today is not the same as the obligation to pay a dollar ten years from now. Presumably, one could take a much smaller sum, invest it today and let the interest on that investment accumulate and compound until you have a dollar on the date ten years from now. The smaller sum is called the "present value" of having that dollar ten years from now, and the interest rate necessary to accumulate and compound that smaller sum up to that dollar ten years from now is called the "discount rate." If one knows the "future value" (the dollar ten years from now) and the discount rate, the process of calculating the present value is called "discounting" the future value to the present. With these general concepts in mind, the TIC of an issue can be more fully defined and compared to the Net Interest Cost (NIC) for the same issue. The TIC is sometimes also called the "internal rate of return" or the "net effective interest rate."

The TIC for an issue is the annual discount rate which, when used to discount all debt service payments on the issue to the date of initial delivery of the issue, using a compounding interval equal to the interest payment periods for the issue, results in the aggregate present value of such debt service payments being equal to the original purchase price (including accrued interest) of the issue. For the purpose of calculating the TIC, sinking fund payments for any term bonds are considered principal payments. Because there is no algebraic formula for the direct computation of the TIC, it must be determined either by successive approximation on a computer or calculator or by using present value tables.

Consider the following example: An issuer chooses to sell $10,000,000 of bonds in five separate maturities (1 year through 5 years) at par values of $1,000,000, $2,000,000, $2,000,000, $2,000,000 and $3,000,000, respectively, and at interest rates of 5.0, 5.1, 5.2, 5.25 and 5.30%, respectively. The price paid for the issue is par, i.e., $10,000,000. See Example 2 under the definition of Net Interest Cost or NIC. The NIC in that example is 5.238%. The TIC as demonstrated by the chart below is 5.236%.

The TIC is the rate that will discount all future payments so that the sum of their present values equals the price. Note that the sum of the present value of all the cash flows equals $10,000,000 when discounted at 5.236%. Interest is assumed to be compounded semiannually.

If the price paid for the issue had been 97% of par, the TIC would have differed even more from the NIC. The price would have equaled $9,700,000. The TIC that would discount the present values to $9,700,000 is 6.24%, whereas the NIC for the same issue would be 6.12%. See Net Interest Cost. The TIC is often used to compare bids at a competitive sale. See also Yield.

See " Principal Participants of a Debt Financing - Roles and Responsibilities of Principal Participants - Trustee/Fiscal Agent/Paying Agent/Registrar/Authenticating Agent ."

To agree to purchase bonds, generally upon initial issuance, in a guaranteed amount, for a guaranteed price and with the intention to resell the bonds to investors.

In a "best efforts underwriting," the underwriter agrees only to use its best efforts to resell bonds to be purchased from the issuer and only agrees to purchase those bonds if the underwriter can resell them.

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

See "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's Counsel."

The difference between the purchase price paid to the issuer for a new issue and the sum of the prices at which the bonds are initially offered to the investing public by the underwriter.

To the extent that the initial offering prices are subsequently lowered by the underwriter, the full amount of the spread may not be realized by the underwriter. The spread is usually expressed in points or fractions thereof. The spread generally consists of:

(i) Management Fee - a fee paid to the managing underwriter for handling the affairs of the syndicate, including, in the case of a negotiated sale, structuring the issue and negotiating with the issuer;

(ii) Expenses - any advertising and printing costs to the underwriter, underwriter's counsel's fees and expenses, computer expenses, travel expenses, MSRB fees, CDAC fees, and other similar expenses;

(iii) Takedown - normally the largest component of the spread, similar to a commission, which represents the income derived by the selling broker or dealer from the sale of the bonds; if bonds are sold by a member of a syndicate, the seller is entitled to the full takedown (also called the "total takedown"); if bonds are sold by a dealer which is not a member of the syndicate, such seller receives only that portion of the takedown known as the concession or dealers allowance, with the balance (often termed the "additional takedown") retained by the syndicate; and

(iv) Risk - the amount of compensation for risks incurred by the underwriter in underwriting the bond issue, relating to the difficulty of marketing the issue, bond market conditions, and the amount of bonds remaining to be resold after the execution of the bond purchase agreement. There is rarely a risk component in the underwriting spread.

In the case of a syndicated offering, a portion of any residual is generally paid to each underwriter within the syndicate on a pro rata basis according to the number of bonds each dealer has committed to sell without regard to the actual sales by each member.

Validation sometimes refer to the process of undertaking a validation action. Validation may also refer to the validating acts passed each year by the California legislature to validate certain types of actions taken by local agencies - including bond financings. These acts, however, do not protect a bond financing from challenge on the grounds of unconstitutionality under the California Constitution.

A special procedure under California law which allows an issuer to have the legality of a bond financing approved, including any issue regarding constitutionality of the bond issue. The issuer files a lawsuit naming "all interested persons" as defendants. Notice of the lawsuit is given by publication in the newspaper and by posting public notices. If no interested person comes forward and challenges the financing, the issuer may ask the court for a judgment declaring that the financing is valid. This process takes approximately 45 days. Once the court issues a validation judgment, and the 30-day appeal period expires, the financing cannot later be challenged in court. However, if an interested person does step forward in a timely manner to challenge the financing, the process can take much longer.

An interest rate which periodically changes based upon an index or a pricing procedure.

For example, the interest rate may be a specified percentage of the weekly Treasury bill auction rate or of the Federal Home Loan Bank borrowing rate, or may be the rate established by the remarketing agent as the rate necessary to remarket the bonds at par. The variable rate may change on a daily, weekly, monthly or other periodic basis.

Variable rate bonds generally have a "demand" feature (see also Demand Bond) allowing the owner to demand that the issuer or another party repurchase the bond upon a specified number of days' notice or at certain times which reflect the intervals at which the rate varies. For example, a variable rate bond bearing interest at a rate which is set each week customarily has a demand feature allowing the bondholder to put the bond on one week's notice. Investors treat such a bond as having a Term of one week. Because interest charged on money borrowed for a short term is normally less than interest on money borrowed for a long term, variable rates are normally lower than long-term fixed rates.

A variable rate is often called a floating rate. Since variable rates are lower than long-term fixed rates, variable rate bonds are also referred to as "lower floaters."

See "General Federal Tax Requirements." Under federal tax law, the limit on the aggregate amount of certain tax-exempt qualified private activity bonds that may be issued during any calendar year.

See also "Appendix A - Working With State Agencies - California Debt Limit Allocation Committee."

The process of trying to resolve a default or other payment problem in a bond financing. A workout may involve assembling a workout "team" of professionals to assist in the process. Workouts often involve negotiations with the bondholders (such as seeking approval to restructure the debt) and with the persons who are obligated to provide funds for repayment of the bonds (such as defaulting landowners in an assessment district).

See "General Federal Tax Requirements." As used in the Tax Code, the discount rate which makes the present value of all payments with respect to an investment equal to its purchase price or, in the case of bonds, equal to the initial offering price at which a substantial amount of the governmental obligations is sold to the public.

If proceeds are used to make loans to nongovernmental persons (as is often the case with qualified private activity bonds), the underwriter's gross spread, costs of issuance and costs of originating, carrying or selling the conduit obligations may be recovered under the conduit obligations without increasing the yield on those conduit obligations.

Additionally, premiums for bond insurance and other credit enhancement fees may be treated as additional interest, thereby increasing the yield of the issue.

Yield curve means the curve obtained by plotting the yield of investment or debt instruments (on the x -axis) against time (on the y -axis). The typical yield curve is upward sloping, so that the shorter the maturity of the instrument, the lower the yield of that instrument, however this is not always true, and sometimes yield curves flatten out or even become "inverted." The yield curve varies over time in response to general economic conditions and the yield curve may be differently sloped for different types of instruments depending on credit quality, tax-exempt status, and other factors.

See Arbitrage Yield Restriction.

The firm retained by the Issuer to verify the calculations leading to the conclusion that the yield on investments acquired with the proceeds of an issue does not exceed the amount permitted under the federal arbitrage rules.

For example, a yield verification consultant is often retained to verify that the yield on the escrow purchased with the proceeds of an advance refunding does not exceed the yield on the refunding bonds.

Similarly, such a firm is also often retained to verify that the effective rate of interest on mortgages acquired with the proceeds of a single family mortgage revenue bond does not exceed the yield on the bonds by more than 1-1/8 percentage points.

See Compound Interest Bond.