Glossary of Municipal Securities Terms

GROSS-UP CLAUSE

A provision in the bond contract in which the issuer agrees to pay a higher rate of interest in the event of the occurrence of certain events, typically where interest on bonds issued as tax-exempt bonds becomes taxable. The provision may call for a higher rate of interest for on-going payments of interest to bondholders and may also provide for a payment to bondholders intended to make the total of prior interest payments made to the bondholders equal to the amount that would have been payable had the bonds previously borne interest at the higher rate.

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