Bond Proceeds Investment Strategies

Up until now, we have discussed investments in which the municipality is the issuer of the securities. For the following section, however, keep in mind that the municipality is the investor rather than the issuer.

Once a municipality has received the funds from issuing bonds, it has to find a place to park those funds until they are ready to be used.

Municipal advisors provide investment advice to the municipality about what to do with these funds. Anyone providing this kind of advice, which includes advice about the investment of the proceeds of municipal securities, advice about the investment of escrow funds, and advice about investing in municipal derivatives, must register with the MSRB as a municipal advisor.

The only exception to this rule is for investment advisers, which are registered with the SEC. As long as an investment adviser sticks to providing advice about investing proceeds and not about issuing municipal securities, the investment adviser will not need to register as a municipal advisor.

Bond proceeds are used for several different purposes. Some of these purposes include:

•Funding capital projects

•Paying the costs of issuing bonds

•Paying the underwriter’s discount

•Servicing the debt payments

•Pre-funding bonds (sinking funds)

•Capitalized interest

•Prefunding new bonds

Capitalized interest is when a portion of the proceeds is put aside to pay the interest on the bonds for a certain amount of time. A capitalized interest account or capitalized interest fund, is an account where a portion of the proceeds are set aside to pay the interest. Often capitalized interest is used for revenue projects during the construction phase, so that interest payments do not have to be paid out of the project revenue stream until after the project is completed. For example, some of the proceeds of a revenue bond that is issued to build a highway, may be capitalized until th