Your Money: A short term tax exempt securities primer
By Juergen Selk
By Juergen Selk
A short-term tax-exempt securities primer
If you are in the 28 percent or higher federal income tax bracket, you are probably considering municipal bonds as a way of earning tax-free income. Short-term municipals is a fixed income market that may help you meet many of your short-term investment objectives. For many people, municipal securities carry a shroud of complexity and confusion with them; if this is the case for you, this series hopes to dispel some of those perceptions. Bear in mind that I am focusing here on short-term options; I will return to long-term alternatives at another point in time.
One of the most innovative sectors of the fixed income market, short-term municipals offer a variety of issues whose structures permit you to meet your short-term investment objectives of liquidity, quality, capital preservation and attractive tax-free yields. Among short-term, tax-exempt options available to the investor are Short-Term Notes, Tax-Exempt Commercial Paper (TECP), Long-Term Securities with a Short-Term Demand Feature, Mandatory Tender Bonds, Bond Interest Term Securities (BITS), and Municipal Preferred Stock. Today, I will discuss Short-Term Notes and Tax-Exempt Commercial Paper.
This most traditional short-term investment has a fixed rate and a maturity of three years or less. If the maturity of the note is one year or less, interest is paid at maturity only; if the maturity is greater than one year, interest is paid every six months. Anticipation notes are the most common type of short-term notes. They are issued in anticipation of funds that will be received by a local or state government at a future date, and are used to meet temporary cash flow deficiencies arising from mismatches between revenues and expenses. The funds securing Tax Anticipation Notes (TANs) are taxes; securing Revenue Anticipation Notes (RANs) are revenues; securing Bond Anticipation Notes (BANs) are bond proceeds; and securing Tax and Revenue Anticipation Notes (TRANs) are both taxes and revenues.
Notes can be an appropriate investment for you if you are seeking a fixed, tax-free return on a security with a short maturity and limited market volatility.
Tax-Exempt Commercial Paper
After short-term notes, tax-exempt commercial paper (TECP) is one of the oldest instruments available to short-term municipal investors. TECP is sold at par and is generally available to short-term municipal investors. TECP is sold at par and is generally available in $100,000 minimum denominations. It is offered on a continuous basis, with available maturities ranging from one to 270 days. The most common maturity range is from 30 to 90 days.
This flexibility is particularly useful for investors with very specific maturity requirements, such as future tax payments or upcoming security settlements. At maturity, investors receive payment of principal plus accrued interest, with payment made in same-day funds. Investors holding maturing TECP will usually be given the option to reinvest the proceeds in a new TECP security on terms reflecting prevailing market conditions.
(Continues next week)
Juergen Selk is a financial consultant at Salomon Smith Barney in Rockford. Salomon Smith Barney does not offer tax or legal advice. If you have an investment or finance-related question, send it to The Rock River Times or to Juergen.Selk@rssmb.com!