Definition:
Bond Anticipation Notes (BANs) are short-term debt securities issued by municipalities or other public entities to raise funds for capital projects that will be financed by a long-term bond issue at a later date. They are essentially a bridge financing tool used to meet immediate funding needs while the long-term bond issue is being prepared.
Key characteristics of BANs:
- Short-term maturity: BANs typically have a maturity of less than one year.
- Repayment: BANs are typically repaid when the long-term bond issue is sold and the proceeds are used to pay off the BANs.
- Tax-exempt: BANs are often tax-exempt securities, making them attractive to investors.
- Lower interest rates: Due to their short-term nature and tax-exempt status, BANs typically offer lower interest rates than other types of municipal bonds.
Why are BANs used?
- Time management: BANs can help municipalities to manage their cash flow by providing temporary financing for capital projects.
- Lower interest rates: BANs often offer lower interest rates than long-term bonds, which can save the issuer money.
- Flexibility: BANs can be issued in smaller amounts and can be easily adjusted to meet changing funding needs.
However, it’s important to note that BANs are not a permanent source of financing and must be repaid when the long-term bond issue is sold.
In essence, bond anticipation notes are short-term debt securities issued by municipalities or other public entities to raise funds for capital projects. They are a temporary financing tool that is often used to bridge the gap between the time when funds are needed and when the long-term bond issue is sold.
