Special bond structures, Financial Management

Assignment Help:

Special bond structures are the municipal securities bearing special security structures. They are of two types - insured bonds and pre-refunded bonds.

  • Insured Bonds: Insured bonds are the bonds secured by the issuer's revenue as well as insurance policies written by the commercial insurance companies. Insurance on a municipal bond is nothing but an agreement by the insurance company to pay the bondholder the amount due on a stated maturity if the issuer defaults on the issue. Once issued, the insurance company cannot cancel its contract for the entire life of the municipal bond.

  • Pre-refunded Municipal Bonds: Bonds originally issued either as revenue bonds or general obligation bonds and later pre-refunded by the issuers are called pre-refunded municipal bonds. Pre-refunding normally occurs when the original bonds are escrowed or collateralized by direct obligations guaranteed by the US government.

For this purpose, a trust is created and all the securities guaranteed by the US government are placed into it. In the trust, the securities are arranged in a manner that cash-flows from these securities match the issuer's obligations to pay. When these cash-flows match with the issuer's obligations to pay, then the pre-refunded bonds no longer are secured as the general obligations or revenue bonds. The reason is - these bonds are secured by the cash flows held in the escrow account. This matching of cash flows with the issuer's obligation renders these municipal bonds with less credit risk and makes them the safest municipal bonds.    


Related Discussions:- Special bond structures

Value index numbers, Value Index Numbers The value index number as desc...

Value Index Numbers The value index number as described earlier is a combination index which combines price and quantity changes. Because of the difficulties experienced in pri

What is the basic approach of the financial management, Q. What is the basi...

Q. What is the basic Approach of the financial management ? 1) The first approach view finance as to providing the funds needed by a business on the most suitable terms. This ap

Explain contingent exposure, Explain contingent exposure and define the adv...

Explain contingent exposure and define the advantages of using currency options to manage this type of currency exposure. Answer: Companies may come across a state where they m

Arrow as an fsa’s risk based approach to regulation, ARROW as an FSA's risk...

ARROW as an FSA's risk based approach to regulation ARROW stands for Advanced, Risk-Responsive Operating Framework. In January 2000, FSA set out a proposed approach to regulati

How working capital affect incremental cash flow estimation, How and why do...

How and why does working capital influence the incremental cash flow estimation for a planned large capital budgeting project?  Explain. Many large projects need additional worki

Capital gain on investment, a. Why do prices of low coupon bonds tend to fl...

a. Why do prices of low coupon bonds tend to fluctuate more than the prices of high coupon bonds? And why do prices of longer te$ to maturity bonds tend to fluctuate more than th

Sunk cost, Sunk Cost This is a cost which has already been incurred and...

Sunk Cost This is a cost which has already been incurred and cannot be affected through present or future decisions.

Exchange rate or currency risk, A bond whose payments are made in for...

A bond whose payments are made in foreign currency has unknown cash flows in domestic currency. This is because the cash flows are dependent on the exchange rate

Valuation using forward rates, We can discount cash flows either by u...

We can discount cash flows either by using spot rates or forward rates, because a spot rate is simply a package of short-term forward rates. Assume that the cash

Stripped mortgage-backed securities , These securities aid in unpacki...

These securities aid in unpacking the cash flows from a pass-through. The most uncomplicated stripped mortgage-backed securities are the PO-IO-security. Unlike a

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd