The Handbook of Municipal Bonds

CHAPTER 62

How to Analyze Tax, Bond, and Grant Anticipation Notes

Sylvan G. Feldstein, Ph.D. Director, Investment Department Guardian Life Insurance Company of America

 

Frank J. Fabozzi, Ph.D., CFA, CPA Professor in the Practice of Finance School of Management Yale University

 

 

 

Notes are temporary borrowings by states, local governments, and special jurisdictions to finance a variety of activities. Usually, notes are issued for a period of 12 months, though it is not uncommon for them to be issued for periods of as short as three months and for as long as three years. In this chapter the structure and credit risk factors of notes are discussed.

TWO MAJOR PURPOSES OF NOTES

There are two general purposes for which notes are issued. One is to even out cash flows. The second is to temporarily finance capital improvements. Each is explained in this section.

Evening Out Cash Flows

Many states, cities, towns, counties, and school districts, as well as special jurisdictions sometimes borrow temporarily in anticipation of the collection of taxes or other expected revenues. Their need to borrow occurs because, while payrolls, bills, and other commitments have to be paid starting at the beginning of the fiscal year, property taxes and other revenues such as intergovernmental grants are due and payable after the beginning of the fiscal year. These notes—identified either as tax anticipation notes (TANs), revenue anticipation notes (RANs), or grant anticipation notes (GANs)—are used ...