Bonds 101, part 1

This article is part of a series to provide an overview of the bond issuance process.

Let’s start with the basics. What are bonds?

• A debt security providing external funds for current expenditures.  Bonds are similar to a mortgage in that dollars are borrowed upfront and repaid over a fixed term.
• The governmental entity is commonly referred to as the issuer or borrower and the investor is known as the bondholder, lender or purchaser.
• When bonds are issued, a repayment source is pledged and certain bond covenants are outlined for the issuer to follow through the repayment term.

More specifically, what are some basic characteristics of municipal bonds?

• Repayment is matched with the useful life of the asset so debt is not outstanding beyond the life of the asset.
• Depending on the source of repayment, the issuance of bonds can provide tax rate management and stability, and assist with financial management and capital planning. Bonds can also help free up operating dollars for other needs.
• Bonds can provide a relatively low-cost way to borrow over a long term, helping an entity to "pay as they use" rather than "pay as they go" where appropriate.
• Interest charged is often tax-exempt, which can translate to a lower interest rate paid by the issuer.

Communities issue bonds to pay for capital expenditures ranging from vehicles and technology to infrastructure, economic development and renovation and construction of public facilities.

Stay tuned for more articles in this series as we dive into the bond issuance process and considerations when issuing bonds.

For more information on this topic, or to learn how Baker Tilly municipal specialists can help, contact our team.

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