calculations indicate that the annual savings would amount to roughly $14.8 million. Calculations based on the most likely proportion of affected revenue issues to the total--24 percent--the total volume involved would be 기 7/ about $35.4 billion. This estimates that 40 percent of total municipal issues are revenue bonds, of which 60 percent would be eligible for commercial bank underwriting. These proportions are close to the proportions of Baa or better rated revenue issues during recent years. Insofar as the volume of unrated revenue issues of bank investment quality is large, the figure used here may be significantly lower than the actual volume of effected issues. In that event, the estimates may substantially understate the savings to municipal authorities. Conclusion The potential savings resulting from added competition in revenue bond underwriting are large, and their magnitude can be expected steadily to increase over the next few years due to probable increases in both the volume of new municipal debt and in the proportion of the new municipal debt that would be within the scope of S. 1306. were employed. Two methods of computing the potential savings to municipal authorities Using the first, we found that the savings over the entire life of new issues of a single year could be expected to increase from $12.5 million in 1968 to at least $27.0 million by 1975, and possibly as much as 7 In this event, annual savings would amount to about $11.8 million by $33.8 million. The same method was used to compute the potential savings on new revenue issues for the period 1968 to 1975. A conservative estimate of these savings for this period--based on the assumption that the proportion of new issues affected would be the same as for the Aa, A, and Baa rated revenue issues for 1965-1966--was $117.8 million. The estimate for the 1968-1975 period based on the most likely proportion of new debt that would be affected by S. 1306 amounted to $182.5 million. A second method designed to compute the possible savings that municipal authorities would enjoy during each year was also employed. This method in part computes the interest savings on amount of outstanding issues. Thus, the calculated savings are initially rather small, but steadily rise as the volume of affected debt outstanding increases. We estimate that the annual savings computed by this method will range from $7.4 million to $14.8 million. The major element of savings to municipalities calculated by each method was due to reductions in net interest cost. Reductions in underwriting spread in each case accounted for less than five percent of total savings to municipalities; for total savings over the life of new issues of a single year, reductions in underwriting spread generally accounted for less than one percent of the total. The case for added competition in revenue bond underwriting thus does not rest on our estimates of reduced spread. The estimates do not take explicit account of the unrated issues of investment quality that might also be underwritten by commercial banks upon passage of S. 1306. Some specialists in municipal bond underwriting believe that the volume of such unrated issues is rather large, although there are no firm estimates as to the actual magnitude. Insofar as there is a large volume of unrated issues whose quality is the equivalent of Baa or higher, our estimates of the potential savings to municipal authorities are too low. GLOSSARY Basis point equals .01 of one percent. Call provisions constitute the conditions under which an issuer may redeem a bond prior to its stated maturity. The call feature is more common for revenue issues than for general obligations. Coupon rate is the amount of interest due each period, expressed as an annual rate on the par (face) amount of the bond. Coupon schedule is used to refer to the entire complex of coupon rates for bonds of different maturities in the issue. General obligation bonds (GOs) are municipal bonds payable without restriction, from all of the available resources of the issuer. "Municipal bonds" is a generic term for bonds issued by the various States and Puerto Rico and their municipal corporations and political subdivisions and by authorities, districts, and other public agencies. There are two broad categories of municipal bonds: general obligation (GOs) and revenue bonds. - - Net interest cost method of computing interest is ordinarily used for municipal bonds. Net interest cost is derived by taking the net interest payments by the municipality total interest payments less any premium or plus any discount of the offering price from the face amount of the issue and dividing by the equivalent borrowing for one year. To derive the equivalent borrowing for one year, the amount of bonds maturing at one time multiplied by the maturity in years is first obtained and then the sum of this product for all maturities in the issue is calculated. In reducing all calculations to an equivalent year basis, the net interest cost method of computing interest rates does not provide for discounting the interest payments. An illustration of the computation of net interest cost is given in Gordon L. Calvert, ed., Fundamentals of Investment Banking (5th ed.; Washington: Investment Bankers Association of America 1967), pp. 128-131. Reoffering yield is the yield to investors at which the winning underwriter is willing to resell a given bond of the issue. In computing the average reoffering yield on an issue, the yields on bonds of particular maturities are weighted by the amount of bonds of that maturity. Revenue bonds are municipal bonds payable from specified resources of the issuer such as tolls, user charges, rents, designated taxes and other revenues. Underwriter's spread is the difference between the price at which the underwriter purchased the issue from the municipality and the price at which the underwriter would resell the issue to investors, expressed in dollars per $1,000 bond. Thus, the spread figure is an anticipated average for the issue based on the initial schedule of reoffering yields on individual bonds of various maturities. Moody's Investors Service rating at time of issue; if not rated at time of issue indicate by NR. 3/ Each maturity should be weighted by the amount within that maturity. If a yield figure is not given, please indicate if the lack of a figure is owing to the fact that (1) the issue was not publicly reoffered (NPR); The yield, on each maturity should be weighted by the amount within that maturity. Difference between the winning and the next best bid on competitive issues in percentage points to three decimal places. NOTE: Please fill in all spaces: if no information available, indicate by NA. |