Debt Administration - PowerPoint PPT Presentation

About This Presentation
Title:

Debt Administration

Description:

Primarily short term. Some debt is held by federal accounts and the Federal Reserve System (Social ... Primarily long term. ... – PowerPoint PPT presentation

Number of Views:53
Avg rating:3.0/5.0
Slides: 12
Provided by: constantin5
Learn more at: http://www.unm.edu
Category:

less

Transcript and Presenter's Notes

Title: Debt Administration


1
Debt Administration
PA 546 Constantine Hadjilambrinos
  • Lecture 13
  • November 29, 2005

2
Federal Debt
PA 546 Constantine Hadjilambrinos
  • Primarily used to finance government operations.
  • Primarily short term.
  • Some debt is held by federal accounts and the
    Federal Reserve System (Social Security,
    Medicare/Medicaid).
  • Majority of debt held by private investors (60
    in 2001).
  • Of this, a continually increasing amount (42.1
    in 2001) is held by foreign investors.
  • This has serious implications for resource
    allocation.

3
State and Local Government (Municipal) Debt
PA 546 Constantine Hadjilambrinos
  • Primarily used to finance capital projects
    (infrastructure).
  • Primarily long term.
  • Full faith and credit debtused for projects
    that do not generate revenue. Often limited
    statutorily.
  • Non-guaranteed debtRevenue bonds.
  • Private debt Industrial Development Bonds.

4
Appropriate Debt Policy
PA 546 Constantine Hadjilambrinos
  • Debt is usually the most appropriate financing
    option for capital projects.
  • If capital projects were to be financed from
    current budget, most would be impossible.
  • Debt financing fulfills equity criteria users
    pay for projects.
  • Most appropriate length of financing is to
    coincide with useful life of project.

5
Mechanics of Bond Values
PA 546 Constantine Hadjilambrinos
  • Calculation based on equations for present and
    future values.
  • FVn Future value in year n
  • PV Present value
  • r Rate of return/interest
  • n Number of years

6
Mechanics of Bond Values
PA 546 Constantine Hadjilambrinos
  • Special terminology for bonds.
  • P Price (present value)
  • F Face value (future value)
  • c Coupon rate (bond interest rate)
  • r Market rate of return
  • m Coupon period (annual or semi- annual)

Annual
Semi-annual
7
Debt Structure and Design
PA 546 Constantine Hadjilambrinos
  • Pursue least-cost marketability.
  • Simplify debt management.
  • Provide appropriate cost signals to decision
    makers.

8
Credit Ratings
PA 546 Constantine Hadjilambrinos
  • Three major credit rating firms
  • Moodys (Aaa, Aa, A, Baa)
  • Standard and Poors (AAA, AA, A, BBB)
  • Fitch (AAA, AA, A, BBB)
  • Ratings reflect level of risk.
  • Lower ratings mean higher interest rates must be
    paid by bond issuers.
  • Investment grade Adequate safeguards against
    default.
  • Junk bonds Lower than Baa or BBB rating (4-6
    above U.S Treasury).

9
Credit Enhancements
PA 546 Constantine Hadjilambrinos
  • State-credit guarantees.
  • Promise by the state to make up any shortfall in
    local resources.
  • Bank letters of credit.
  • Promise by a bank to make principal and interest
    payments of specified amount and duration (there
    is a fee).
  • Municipal bond insurance.
  • Purchased from an insurer, takes payments on in
    case of trouble (there is a fee).

10
Bond Issue Costs
PA 546 Constantine Hadjilambrinos
  • Underwriting fees (Underwriter purchases bond
    issue and resells it).
  • Rate insurance (Provides security against rate
    increases).
  • Pricing (Depends on Rating and maturity)can be
    complicated for composite bond issue (comprising
    of bonds of different maturities).

11
Creative Finance
PA 546 Constantine Hadjilambrinos
  • Lease-purchase financing.
  • Payments part of current operations expenditures.
  • Gets around various restrictions on government
    borrowing.
Write a Comment
User Comments (0)
About PowerShow.com