Duration: 3:22
Level: Beginner

In this lesson, Interactive Brokers’ senior market analyst Steven Levine gives an overview into shorter-term municipal securities, including TANs, RANs, TRANs and BANs, as well as more complex instruments such as auction rate securities (ARS) – all part of a video series about the U.S. Municipal Bond Market, available at IBKR Traders’ Academy.

Study Notes:

The maturity of a municipal bond, whether a GO, revenue bond, or otherwise, is one of the most important features for buyers to consider.

Similar to corporate and government debt, the longer the bond’s maturity, the more exposure that bond holder has to interest-rate risk. This means there is a greater chance rates could rise (and prices fall) if the bond is scheduled to mature in 10-, 20- or 30-years compared to shorter-dated notes.

There are also other factors that may present downside risks to the bond’s performance, and these will also have a higher probability of occurring the longer the bond is held, such as a rating downgrade or default.

For those bond investors seeking shorter-dated notes of about a year in length or less, some examples in the municipal note market include:

  • Tax Anticipation Notes (TANs): These usually invest in a GO-related project that is financed in anticipation of future tax receipts, typically from property.

For example:

A local government has come up with a $6 million budget to build a public park – the development of which has been slated for June 2017 – but the city only has $4 million in available funds.

Local officials may eye the taxes it will receive from businesses and individuals after the tax filing deadline in April of the following year and issue $2 million in TANs with a May 2018 maturity. 

  • Revenue Anticipation Notes (RANs): These are very similar to TANs, but the project funding is typically pegged to the anticipated revenues of federal or state subsidies.
  • Tax and Revenue Anticipation Note (TRANs): A bundle of TANs and RANs.
  • Bond Anticipation Notes (BANs): Here, the project financing relies on the future sale of long-term bonds.

For example:

Virginia’s Chesapeake Bay Bridge and Tunnel District sold first tier general resolution revenue bond anticipation notes in large part to help finance its Parallel Thimble Shoal Tunnel Project, as well as pay capitalized interest on the issuance.

The BANs, issued as interim financing for that project, were expected to provide interest cost savings.

Auction Rate Securities (ARS)

More complex short-dated municipal securities include ARS, which are long-term investments with interest rates that reset over short-term intervals via auctions.

In short, ARS may either be bonds, typically with tenors of 20 to 30 years, or they may be preferred shares with a cash dividend. Interest rates on both the bonds and the dividend will vary based on rates that are set through auctions. These rates are generally set at short periods, usually anywhere from 7 to 35 days.

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