Glossary of Municipal Securities Terms

Second Edition (January 2004)

T

TAKEDOWN – See:  SPREAD.

TAKE OR PAY CONTRACT – A sales agreement that requires the purchaser to pay the seller a minimum amount whether or not goods or services are available and, if available, whether or not the purchaser uses them.  This type of contract is often used in financings for utilities.  For example, in electric power sales contracts, payments will be made by the purchasers to the electricity wholesaler whether or not the power supply projects are complete or operational.  Such payments are not conditioned upon the performance of the wholesaler, the completion or operation of the power project or the use of the goods or services.

TAKE OUT – A transaction that fully liquidates an investor’s position in a given security.

TAN – See:  NOTE – Tax anticipation notes.

TAX – Compulsory charge levied by a government unit for the purpose of raising revenue.  Taxes are imposed under a government’s taxing power and are distinguishable from special assessments, which are levied according to the benefits received, and from fees, which bear a reasonable relation to the costs of administration or regulation.  Compare:  SPECIAL ASSESSMENT.  See:  AD VALOREM TAX; EXCISE TAX.

TAXABLE BOND – See:  TAXABLE SECURITY.

TAXABLE EQUIVALENT YIELD – The interest rate that must be received on a taxable security to provide the holder the same after-tax return as that earned on a tax-exempt bond.  Because interest earned on municipal securities generally is not subject to federal income taxation, a tax-exempt bond does not have to yield to a holder as much as a taxable security to produce an equivalent after-tax yield; this differential is attributable to the effect of the tax liability incurred by the holder if it held a taxable security.  The taxable equivalent yield varies according to the holder’s marginal federal income tax bracket and, where applicable, any state or local tax liability as well.  The formula for determining the taxable equivalent yield is:

TAXABLE EXCHANGEABLE BOND – A bond (sometimes referred to as a “Cinderella Bond”) initially issued on a taxable basis that may convert to tax-exempt status upon the occurrence of a specified condition precedent (e.g., volume cap allocation becoming available).  Tax-exempt rates typically are stated at the time of initial offering when the taxable rates are established.  See:  CONVERTIBLE BOND.

TAXABLE MUNICIPAL BOND – See:  TAXABLE MUNICIPAL SECURITY.

TAXABLE MUNICIPAL SECURITY – Bonds or other securities issued by a municipal issuer for which interest or other investment return is included in gross income for federal income tax purposes.  A municipal security may be issued on a taxable basis because the intended use of proceeds does not meet federal tax law requirements for the exclusion from gross income (e.g. private activity bonds that are not qualified bonds) or because certain other federal tax law requirements are not met (e.g., insufficient volume cap).  In some cases, municipal securities are initially issued on a tax-exempt basis but subsequent events (e.g., failure to comply with arbitrage requirements or change in use of proceeds to a non-qualifying purpose) may cause the Internal Revenue Service to declare the issue taxable.  Private activity bonds that are subject to the federal alternative minimum tax are not considered taxable municipal securities.  Compare:  AMT BOND; TAXABLE SECURITY; TAX-EXEMPT BOND.  See:  ALTERNATIVE MINIMUM TAX; ARBITRAGE BONDS; PRIVATE ACTIVITY BOND; QUALIFIED BOND; VOLUME CAP.

TAXABLE SECURITY – A bond or other security that does not qualify for an exclusion from gross income under federal tax law.  Corporate, U.S. government and agency debt generally is federally taxable.  In some cases, municipal securities also are taxable under federal tax law.  Compare:  AMT BOND. See: TAXABLE MUNICIPAL SECURITY.

TAXABLE YIELD EQUIVALENT – See: TAXABLE EQUIVALENT YIELD.

TAX ALLOCATION BOND – See:  TAX INCREMENT BOND.

TAX AND REVENUE ANTICIPATION NOTE (TRAN) – See:  NOTE – Tax and revenue anticipation notes.

TAX ANTICIPATION NOTE (TAN) – See:  NOTE – Tax anticipation notes.

TAX BASE – The total property and resources available to a governmental entity for taxation.

TAX CALL or REDEMPTION – See:  REDEMPTION PROVISIONS.

TAX CERTIFICATE – See:  ARBITRAGE CERTIFICATE.

TAX COMPLIANCE CERTIFICATE – See: ARBITRAGE CERTIFICATE.

TAX-EXEMPT BOND – Another term for a municipal bond, other than taxable municipal bonds.  Interest on most municipal securities is excluded from gross income for federal income tax purposes and may or may not be exempt from state income or personal property taxation in the jurisdiction where issued or in other jurisdictions.  If the bond is exempt from state income tax, it possesses “double exemption” status.  “Triple exemption” bonds are exempt from municipal, local income or other special taxes, as well as from federal and state income tax.  Compare:  TAXABLE MUNICIPAL SECURITY.

TAX INCREMENT BOND – A bond (also known as a “tax allocation bond”) payable from the incremental increase in tax revenues realized from any increase in property value resulting from capital improvements benefiting the properties that are financed with bond proceeds.  Tax increment bonds often are used to finance the redevelopment of blighted areas.  See:  PRIVATE ACTIVITY BOND – Qualified redevelopment bonds.

TAX LOSS SWAP – See:  TAX SWAP.

TAX RATE – The amount of tax stated in terms of a unit of the tax base; for example, 10 mills per dollar of assessed valuation of taxable property.  See:  MILL; MILLAGE.

TAX RATE LIMIT – The maximum rate or millage of tax that a local government may levy by law.  This limit may apply to taxes raised for a particular purpose or for all purposes; to a single government, or class of governments; or to all governments operating in a particular area.  See:  AD VALOREM TAX; MILL; MILLAGE; TAX RATE.

TAX REGULATORY AGREEMENT – See:  LAND USE RESTRICTION AGREEMENT.

TAX ROLL – The official list showing the amount of taxes levied against each taxpayer or parcel of property, prepared and authenticated in proper form to warrant the collecting officers to proceed with administering the tax.

TAX-SUPPORTED DEBT – Long-term indebtedness payable from tax revenues.  Compare:  SELF-SUPPORTING DEBT.

TAX SWAP –The sale of a security at a loss and the simultaneous purchase of another similar security.  By creating a loss, the tax swap reduces the investor’s current tax liability.  The tax swap may also serve purposes similar to those of other types of swaps.  Compare:  SWAP; WASH SALE.

TBMA – See:  BOND MARKET ASSOCIATION.

TCRs (TRANSFERABLE CUSTODIAL RECEIPTS) – See:  CUSTODIAL RECEIPTS.

TECHNICAL DEFAULT – See: DEFAULT.

TEFRA – Acronym for “Tax Equity and Fiscal Responsibility Act” of 1982.  As a pre-condition for the exclusion from gross income for federal income tax purposes of interest on all qualified private activity bonds, TEFRA requires, among other things, that the issue be approved (a “TEFRA approval”) either by an elected official or body of elected officials of the applicable governmental entity after a public hearing (a “TEFRA hearing”) following reasonable public notice (a “TEFRA notice”) or by voter referendum of such governmental entity.  See:  PRIVATE ACTIVITY BOND; QUALIFIED BOND.

TEFRA APPROVAL – See:  TEFRA.

TEFRA HEARING – See:  TEFRA.

TEFRA NOTICE – See:  TEFRA.

10b-5 OPINION – See:  DUE DILIGENCE OPINION.

TENDER – The surrender of a security to the issuer or its agent (e.g., a tender agent) for purchase.  A tender may be mandatory or optional.  See:  MANDATORY TENDER; TENDER OPTION.

TENDER AGENT – (1) In the case of tender option bonds, an agent of the issuer to whom bondholders tender their bonds upon a mandatory or optional tender.  In many cases, the tender agent will also act as the remarketing agent for the bonds.  See:  REMARKETING AGENT; TENDER; TENDER OPTION BOND.

(2) In the case of a tender offer, a broker-dealer or bank responsible for coordinating the process of soliciting bondholders. See: TENDER OFFER.

TENDER OFFER – A proposal requesting that bondholders sell their bonds to the issuer or the issuer’s representative (e.g., a tender agent) for a stated price.

TENDER OPTION – (1) A provision in a bond contract under which the investor has the right, on specified dates after required notification, to surrender the securities to the issuer (or someone acting on the issuer’s behalf, such as a tender agent) at the predetermined price (usually par).  This is sometimes referred to as an “optional tender” or “put option.”  Compare:  MANDATORY TENDER.  See:  TENDER; TENDER AGENT.

(2) An instrument issued by a financial institution that permits the purchaser to sell, after giving required notice, a specified amount of securities from a specified issue to the financial institution on a predetermined future date or dates (the “expiration date(s)”) at a predetermined price (the “strike price”). Tender options are generally backed by a bank letter of credit or line of credit. The tender option is often originally sold as an attachment to the security. In many cases, however, the tender option may be sold separately from that security (a “detachable call”) or sold attached to other securities from the same issue. See: DETACHABLE CALL.

(3) An agreement made by the parties to a particular transaction under which the purchaser has the right to surrender the securities to the seller at a specified price on a specified future date or dates. This arrangement is distinguished from (2) above in that this tender option right is not transferable and is rarely reflected in a separate instrument, but rather is typically described only on, or as an attachment to, the transaction confirmation.

TENDER OPTION BOND – Obligations, also known as “put bonds” or “puttable securities,” that grant the bondholder the right to require the issuer or a specified third party acting as agent for the issuer (e.g., a tender agent) to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions.  The put option or tender option right is typically available to the investor on a periodic (e.g., daily, weekly or monthly) basis.  Typically, these securities are floating or variable rate securities, with the put option exercisable on dates on which the floating rate changes.  These latter securities are often called “variable rate demand obligations,” or, colloquially, “lower floaters.”  See:  FLOATER; LOWER FLOATER; TENDER; TENDER AGENT; TENDER OPTION; VARIABLE RATE; VARIABLE RATE DEMAND OBLIGATION.

TENNESSEE VALLEY AUTHORITY (TVA) – See:  AGENCIES.

TERM BONDS – Bonds comprising a large part or all of a particular issue that come due in a single maturity, typically due more than one year after the final amortization of the serial bonds.  The issuer agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity or for payment at maturity.  Compare:  BALLOON MATURITY; BULLET; SERIAL BONDS.

TIC – See:  TRUE INTEREST COST.

TOMBSTONE – An advertisement placed by underwriters announcing the terms of a new issue of municipal securities, setting forth some or all of the following information: the name of the issuer, maturities, interest rate, reoffering scale, ratings and members of the underwriting syndicate.  Compare:  NOTICE OF SALE.

TOTAL DEBT SERVICE – See:  DEBT SERVICE.

TOTAL TAKEDOWN – See:  SPREAD.

TRADE DATE – The date on which a buyer and seller effect a transaction in securities.  Compare: SETTLEMENT DATE.

TRAN – See:  NOTE – Tax and revenue anticipation notes.

TRANSACTION ASSESSMENT – The fee charged to broker-dealers by the MSRB on their secondary market transactions.  This fee and the underwriting assessment are the primary source of funding for the operation of the MSRB.  See:  ANNUAL FEE; INITIAL FEE; UNDERWRITING ASSESSMENT.

TRANSACTION REPORTING SYSTEM (TRS) – The Transaction Reporting System is a system requiring the timely submission by broker-dealers to the MSRB of information relating to customer and inter-dealer transactions in municipal securities.  This information, including but not limited to transaction prices, is made available to the public and to NASD and the various bank regulatory agencies that enforce MSRB rules.  See:  APPROPRIATE REGULATORY AGENCY; CUSTOMER TRADE; INTER-DEALER TRADE; NASD; TRANSPARENCY.

TRANSCRIPT – See:  BOND TRANSCRIPT.

TRANSFER – The process of changing the registered owner of a security by (a) updating the list of registered holders of an issue and (b) if the security is certificated, issuing a new securities certificate (or, in some cases, reissuing the old certificate) with the new registered owner’s name imprinted on it.  See:  REGISTRAR; REGISTERED BOND; TRANSFER AGENT.

TRANSFERABLE CUSTODIAL RECEIPTS (TCRs) – See:  CUSTODIAL RECEIPTS.

TRANSFER AGENT – The person or entity that performs the transfer function for an issue of registered municipal securities.  This person or entity may be the issuer, an official of the issuer or a third party engaged by the issuer to act as its agent.  The trustee under a trust indenture often also acts as transfer agent.  Compare:  REGISTRAR.  See:  REGISTERED BOND; TRANSFER; TRUSTEE.

TRANSFERRED PROCEEDS – Under the Internal Revenue Code, unspent proceeds of a refunded issue that are allocated to a refunding issue when the proceeds of the refunding issue are used to pay the principal of the refunded issue.  When refunded proceeds are “transferred” or allocated to a refunding issue, the refunded proceeds and any investments become subject to yield restriction and rebate at the yield on the refunding issue or yield reduction payments in lieu of rebate (sometimes referred to as a “transferred proceeds penalty”).  See:  ARBITRAGE REBATE; YIELD RESTRICTION.

TRANSFERRED PROCEEDS PENALTY – See:  TRANSFERRED PROCEEDS.

TRANSPARENCY – The ability of market participants to be able to discover the price at which a security is trading and the depth and breadth of the market for that security.  The public dissemination of information relating to transactions in municipal securities is designed to improve price transparency.  See:  TRANSACTION REPORTING SYSTEM.

TRAVELLING BIG BOY LETTER – See:  INVESTOR LETTER.

TRAVELLING LETTER – See:  INVESTOR LETTER.

TREASURY SECURITIES – Debt obligations of the United States Government sold by the Treasury Department in the form of bills, notes and bonds (as well as SLGS sold to issuers of municipal securities) backed by the full faith and credit of the United States Government:

Bills – Short-term obligations that mature in one year or less and are sold on the basis of a rate of discount.

Notes – Obligations that mature between one year and ten years.

Bonds – Long-term obligations that generally mature ten years or more.

Compare: AGENCIES. See: SLGS.

TRIPLE EXEMPTION – See:  TAX-EXEMPT BOND.

TRS – See:  TRANSACTION REPORTING SYSTEM.

TRUE INTEREST COST (TIC) – Also known as “Canadian Interest Cost.”  Under this method of computing the interest expense to the issuer of bonds, true interest cost is defined as the rate, compounded semi-annually, necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the new issue of bonds.  TIC computations produce a figure slightly different from the “net interest cost” (NIC) method because TIC considers the time value of money while NIC does not.  Compare:  NET INTEREST COST.

TRUE INTEREST COST BID – An underwriter’s bid that takes into account both the total dollar of interest payments and the timing of the interest and principal payments.  See:  TRUE INTEREST COST.

TRUSTEE – A financial institution with trust powers that acts in a fiduciary capacity for the benefit of the bondholders in enforcing the terms of the trust indenture.  In many cases, the trustee also acts as paying agent, registrar and/or transfer agent for the bonds.  See:  PAYING AGENT; REGISTRAR; TRANSFER AGENT; TRUST INDENTURE.

TRUST INDENTURE – A contract between the issuer of municipal securities and a trustee for the benefit of the bondholders.  The trustee administers the funds or property specified in the indenture in a fiduciary capacity on behalf of the bondholders.  The trust indenture, which is generally part of the bond contract, establishes the rights, duties, responsibilities and remedies of the issuer and trustee and determines the exact nature of the security for the bonds.  The trustee is generally empowered to enforce the terms of the trust indenture on behalf of the bondholders.  In many governmental issues (particularly for general obligation bonds and some types of limited tax bonds and revenue bonds), the issuer may forego using a trust indenture and set forth the duties of the issuer and the rights of bondholders in the bond resolution.  Compare:  BOND RESOLUTION.  See:  BOND CONTRACT; TRUSTEE.

TVA (TENNESSEE VALLEY AUTHORITY) – See:  AGENCIES.

TWO-SIDED MARKET – A statement of the bid and offer prices at which a broker-dealer would be willing to effect a transaction in a security.  Some broker-dealers make two-sided markets on larger, term bond issues.  Generally, two-sided markets are made in actively traded bonds and rarely made in inactively traded bonds.  See:  BID; OFFER; MARKET MAKER; SPREAD.