Common Terminology

Using proper terms, the Original Issue Discount is “Accreted” and the Original Issue Premium and Bond Issuance Costs are “Amortized”. However, when referring to both actions, “Amortize” will be used as the verb.

To an investor, the term bond would be a single unit of investment where that investor likely purchased more than one bond.

Within Advantage Financial, the term bond refers to a debt instrument record defined on the Bond (BOND) page.

It is a fundraising mechanism. Municipal governments raise money for current needs by selling bonds, which are a promise to pay a certain amount on a pre-determined maturity date. In most cases, the current price a bond is sold for is less than its eventual maturity amount. (You buy a bond for $4,000 now, and in 20 years it will be redeemable for $5,000.) Some bonds pay interest “coupons” during the life of the bond, and some do not. A pre-set amount of Bonds is offered for sale with identical terms in a Bond Issue. Multiple Bond Issues may be grouped into a single Bond Series.

Within a bond series, issues are made unique by data values such as the maturity date and interest rate. For example, a bond series may include multiple bond issues, each maturing in a subsequent year. A bond issue is associated with a single CUSIP.

The Bond Series is the overall group of bonds created for a single purpose. Within a Bond Series, individual bond issues are tracked by their CUSIP number.

The amount of the bond proceeds that is set aside to pay future interest. Procedurally, there are limits to the amount of interest that can be capitalized in this manner (for example, 12 months' worth). Sites generally post Capitalized Interest to a Debt Service Fund or other account, from which interest payments occur. The difference between this ‘set aside’ and a Sinking Fund earlier is the source of the funds set aside – bond proceeds in the case of Capitalized Interest. The transfer of these resources is generally outside of any Debt Management batch process. However, through reporting of interest payments required in each year and using a Debt Type of Internal Loan, setup can be done where there is a yearly transfer from operating funds to the Debt Service Fund with an Internal Debt Accounting transaction.

A Committee on Uniform Securities Identification Procedures (CUSIP) number uniquely identifies most securities, including stocks of all registered U.S. and Canadian companies, and U.S. government and municipal bonds.

The estimated remaining period during which the property is expected to be economically usable by one or more users, with normal repairs and maintenance, for the purpose for which it was intended at the inception of the lease without limitation of the lease term. Estimated Useful Life is a similar term used within the Fixed Assets functional area.

Cost incurred by the lessee over the life of a lease for such things as insurance, maintenance, and tax expenses. These costs are often the responsibility of the lessor to pay with money paid by the lessee.

Face Value is the stated value of a security. Usually in $1,000 or $10,000 increments but can be other values (a.k.a. Par Value or Denomination).

The estimated interest rate that the lessee would have to pay if the leased property was purchased and financed over the period covered by the lease. This rate is typically the interest rate for a capital lease except when the lessor’s required annual rate of return is known (or can be approximated) to the lessee and the lessor’s rate is less. The rate for the lessor is also known as the Implicit Interest Rate. It is this implicit rate that when applied to the minimum lease payments to arrive at the fair value of the property being leased.

Lessor costs related to the negotiation and execution of a lease. These costs come in two different varieties:

• Those costs paid to vendors such as an independent appraisal are called Incremental Direct Costs.

• Those costs absorbed by the lessor through direct employee time on a specific lease are called Internal Direct Costs.

For operating leases, the lessor should defer initial direct costs and allocate them over the lease term in proportion to the rental income.

For a sales-type capital lease, the lessor should expense initial direct costs at the beginning of the lease.

For a direct financing lease, the lessor should add these costs to the net investment in the lease and amortize them over the life of the lease.

Lessor costs for indirect time or time spent on overall lease management (not on a specific lease). These costs should not be amortized as they do not apply to a particular lease.

The price at which a security is issued based on market conditions, terms of the security, and the credit rating of the issuer.

A lease is defined as a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Any contract that meets this definition should be accounted for under the leases guidance, unless specifically excluded in GASB Statement 87.

The fixed, non-cancelable term of the lease plus:

• All periods covered by the bargain renewal options

• All periods for which failure to renew the lease imposes a penalty on the lease when at the inception of the lease the renewal option seemed reasonably assured

• All periods covered by ordinary renewal options during which a guarantee by the lessee of the lessor’s debt related to the lease property is expected to be in effect

• All periods covered by ordinary renewal options preceding the date as of which a bargain purchase option is exercisable

• All periods representing renewals or extensions of the lease at the lessor’s option

However, in no circumstances should the lease term be assumed to extend beyond the date a bargain purchase option is exercisable.

Those payments a lessee is obligated to make or can be required to make in connection with the leased property. Contingent rentals should not be considered part of the minimum lease payments. FASB Statement 13 defined contingent rentals as “the increases or decreases in lease payments that result from changes occurring subsequent to the inception of the lease in the factors on which lease payments are based.”

For a lessee, the following criteria are applied:

• Executory costs (e.g. insurance, maintenance, and taxes paid by the lessee) are not part of MLP.

• If a bargain purchase option exists, the bargain purchase amount must be included in the MLP.

• MLP should never include any guarantee by the lessee of debt of the lessor.

• A guarantee by the lessee of the residual value of the property at the expiration of the lease term should be included in the minimum lease payments, whether or not the payment of the guarantee constitutes a purchase of the leased property.

• MLP includes any payment that the lessee must make upon failure to renew or extend the lease. However, if it can be reasonably assured that lease will be extended this payment is not included in the MLP.

For a lessor, the same principals above apply with the addition of any residual value or rental payments beyond the lease term by a third party.

As opposed to a Municipal Bond, a Municipal Note is a short-term debt issue typically referred to as a “note.” They generally contain a maturity schedule of one year or less. Municipal Bond Issues typically contain a maturity period of more than one year. Both types are handled the same way in Advantage, and the term “bond” is generically used for both.

This is the amount by which the Face Value of a security exceeds its Issue Price at the time of its original issuance. The original issue discount is amortized over the life of the security.

When the market rate of interest for a similar security is less than the stated interest rate of the security, that security will sell at a discount (Issue Price < Face Value).

The amount by which the Issue Price of a security exceeds the Face Value at the time of its original issuance. The original issue premium is often amortized over the life of the security and results in an adjustment to the basis of the security. The amount of original issue premium received by the issuer in a primary offering, also known as the “bond premium,” is generally treated as proceeds of the issue.

When the market rate of interest for a similar security is greater than the stated interest rate of the security, that security will fetch a premium (Issue Price > Face Value).

When the Issue Price of a security is equal to the Face Value of the security, it is said to be issued at ‘Par’.

An agent (often a bank) who receives payments from the bond issuer (the Advantage site), and then distributes the payments to the bond holders (a.k.a. disbursing agent or underwriter).

The value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk.

During a bond sale, it is possible that the issue date (the date the bonds are for sale) is later than the dated date (the date on which interest begins to be accrue). In this case, bond proceeds would include money from the buyer to “purchase” the interest that was already accrued. The additional cash from the sale of the accrued interest is booked with the bond and offset to a “Purchased Interest” account.

A scenario where new bonds are issued in order to pay off older bonds. In this scenario, the bonds have a relationship. The new bonds are considered current, but the old bonds are known as “Refunded” (as opposed to “Completed”).

This is the estimated fair value of the leased asset at the end of the lease term. If the lessee agrees to make up any deficiency below the stated amount that the lessor realizes in residual value at the end of the lease term that stated amount is the guaranteed residual value.

This lease is the same as a Direct Financing Lease but there is a profit (or unlikely loss) for the lessor because the fair value of the asset is greater than the net book value.

A short term lease is defined as a least that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Lessees and lessors should recognize short term lease payments as outflows or resources or inflows of resources, respectively, based on the payment provisions of the lease contract. - From GASB Statement 87.

This is an account into which governments periodically set aside money for the repayment of a debt. This could be tracked as a fund code, a sub fund, or it could be tracked with a different Chart of Account element (for example, a Balance Sheet Account). In many cases, this is a Debt Service Fund to which resources are manually transferred outside of any Debt Management batch process. That transfer may begin just after the initial issue and continue until maturity. However, through reporting of principal payments (and even interest) required and using a Debt Type of Internal Loan, setup can be done where there is a transfer from operating funds to the Debt Service Fund with an Internal Debt Accounting transaction just before each principal payment.

The interest rate an investor will receive if a long-term, interest-bearing investment, such as a bond, is held to its maturity date. Also called the “Internal Rate of Return”, it takes into account purchase price, redemption value, time to maturity, coupon yield, and the time between interest payments. Recognizing the “time value” of money, it is the discount rate at which the present value of all future payments would equal the present price of the bond.