
December 2008
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Glossary of Finance-related Terms

Bond. A debt instrument through which an investor loans money to a borrower for a set period of time at an agreed-upon interest rate.

Bond counsel. A lawyer or law firm retained, usually by a bond issuer, to help ensure that the issuer is authorized to issue the proposed bonds and that all legal, including tax-related, requirements are met.

Bond maturity date. The date on which a borrower must pay bondholders any remaining principal and interest on the loan.

Bond term. The lifespan of the investment, that is, the time from when bonds are issued until all payments must be made by the borrower and received by the lender.

Categorical aid. Support from the state or federal governments that is targeted for a particular purpose or program (e.g., special education) and, with rare exception, cannot be spent on anything else. In education, such money is usually given in addition to general-purpose revenue.

Conduit issuer. A public entity, such as a state bonding agency or a city, that may issue a taxexempt bond on behalf of a third party, such as a hospital or a charter school. A conduit issuer provides indirect access to financing. A conduit issuer is not an underwriter but works with one.

Construction inflation index. A statistical measure of changes in the cost of construction over time in a specific area (e.g., region, state).

Credit enhancement. Improving the credit-worthiness of an entity or individual seeking financing.

Debt-service reserve fund. An account established and uniquely dedicated to paying off bonded debt if a borrower defaults on a loan.

General obligation bond. A bond backed by the full faith and credit of the government and repaid through a variety of tax revenues.

Letter of credit. Arrangement with a bank or other lending institution that agrees to substitute its credit for the borrower's credit and guarantees payment of the borrower's debt up to a specified amount. Borrower pays fees to the bank providing a letter of credit.

Limited obligation bond (also known as a revenue bond). A bond issued by a municipality, state, or other public entity authorized to build, acquire, or improve a revenue-producing property (e.g., public transit system, toll road). Revenue bonds are payable from specified revenues only, usually the revenues from the facility for which the bond was originally issued.

Moral obligation bond. A moral obligation is not backed by the full faith and credit of the government and the government is not legally obligated to repay the debt. A moral obligation is backed by the non-legally binding promise of a governmental entity to repay the debt.

Municipal bonds. A debt security issued by a state, municipality, or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes.

Operational revenue. Funding used to pay for regular, ongoing costs of doing business, such as staff salaries and utilities costs.

Reserve fund. A pool of money dedicated to repaying investors in the event of a loan default.

Tax-exempt bonds. Bonds for which earnings are exempt from federal taxes.

Trustee. An individual who holds or manages assets for the benefit of another. In the case of bonds, a trustee works on behalf of the bond issuer to handle administrative aspects of the loan (e.g., receiving payments from the borrower and passing them to the lenders).

Underwriter. The investment banker or group of investment bankers that purchase new bonds and earn money by distributing it to investors. As part of this, they evaluate the risks involved in the bonds.

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Last Modified: 02/05/2009