ABSTRACT
The previous chapters in Part VI showed that debt has been used as a tool of fiscal and monetary policies by the federal government. According to Keynesian macroeconomic theories, debt-financed governmental expenditures are supposed to stimulate the national economy. In contrast, state and local governments are more likely to borrow monies by issuing municipal bonds to finance various capital projects when general fund tax revenues are not sufficient for launching projects. This chapter introduces specific mechanics of issuing municipal bonds. Readers can easily apply the mechanics of municipal bonds to Treasury securities issued by the federal government as well. This chapter focuses on the following topics:
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Bonds are promissory notes the principal of which borrowers of money will pay back by a certain date. The principal is the total amount owed to lenders. As explained in Chapter 11 in Part II on cost-benefit analysis, whenever borrowers borrow monies (i.e., sell or issue bonds), they have to pay fees for using lenders’ monies. The fees are interest on the outstanding principal. Until readers get familiar with the mechanics of bond management, coupon payment will be used instead of interest, although coupon payment is a somewhat outdated concept. Coupon payment refers to the fees for using lenders’ monies because the coupon portion of bonds will specify how much borrowers should pay lenders as compensation. Borrowers have to periodically pay a percentage (or coupon rate) of the principal amount they borrowed and must pay back
the principal by a certain date. This is referred to as the maturity of bonds (California Debt and Investment Advisory Commission 2005, 2006; Finkler 2010, 230).
