Municipal Note
What Is a Municipal Note?
A municipal note is debt issued by state and nearby governments to finance capital expenditures, for example, construction projects. Municipal notes are interesting to investors since they mature in one year or less, offer fixed income, and are frequently exempt from income tax at the federal as well as state levels.
Understanding a Municipal Note
At the point when neighborhood or state governments choose to raise funds to finance a project that would benefit the region, they regularly opt for municipal notes. Municipal notes are short-term debt securities issued with maturity terms of 12 months, in spite of the fact that maturities can range from 90 days to three years.
A city government, for instance, may issue a municipal note to raise capital to finance another park in the city. Municipal notes are normally issued in anticipation of tax receipts, revenue, or proceeds from a bond issue.
Municipal notes are less sensitive to an interest rate change than municipal bonds.
Special Considerations
While a majority of municipal bonds make interest payments semiannually, municipal notes will generally make just a single payment upon maturity, which incorporates both interest and principal payment obligations.
Municipal notes typically pay lower coupons than corporate notes with comparative maturities, but since the yield is tax-free, the after-tax basis might be higher for a municipal bond. Municipal notes are exempt from federal income taxes and once in a while from state and nearby taxes too.
Investors can determine the risk of investing in a specific municipal note by looking at the ratings issued by Moody's and by Standard and Poor's. Moody's gives municipal notes three potential ratings: MIG 1 (best quality), MIG 2 (high quality), and MIG 3 (adequate quality). Standard and Poor's utilizes a four-layered rating system: SP-1+, SP-1, SP-2, and SP-3. Just the initial three are viewed as worth investing in. SP-3 municipal notes are viewed as speculative.
Types of Municipal Notes
Bond Anticipation Notes
Bond anticipation notes (BANs) are issued in anticipation of long-term financing, which when issued is utilized to retire or pay off BANs. A borrowing entity that is due to start work on another project might choose to issue long-term bonds to finance the project. In any case, the issuance of these bonds may not be imaginable prior to the send off of the project due to certain legal, regulatory, or compliance procedures that could create a setback for giving new bonds.
To continue with work on another project and to have the funds important to finance the project, the governmental issuer might choose to issue short-term municipal notes, BANs, as a source of financing in the interim. At the point when the long-term bonds are issued, the proceeds are utilized to make the interest and principal payments on the BANs.
Tax Anticipation Notes (TAN)
The interest and principal payments of tax anticipation notes (TANs) are secured by future tax revenue. TANs are issued by states or municipalities to finance current operations before tax revenues are received. At the point when the issuer gathers the taxes, the proceeds are then used to retire the tax anticipation notes.
Revenue Anticipation Notes (RAN)
Revenue anticipation notes (RANs) are municipal notes whose interest and principal payments are secured by the anticipated non-tax revenue of a project. At the point when the project is completed and begins generating revenue sometime not too far off, the revenue is utilized to pay off the RAN.
Highlights
- A municipal note is a debt that state and neighborhood governments issue to finance specific capital expenditures, for example, construction projects.
- The three types of municipal notes incorporate bond anticipation notes, tax anticipation notes, and revenue anticipation notes.
- Municipal notes make one payment upon maturity that incorporates both interest and principal payment, and they are exempt from federal income tax and now and again state and neighborhood income tax.
- Neighborhood and state governments issue municipal notes when they are attempting to fund a project that benefits the region.
- These are short-term debt securities that typically mature around 12 months, despite the fact that maturity might be somewhat less or marginally greater long.
