Chapter 30 Working Capital Management 803
bre44380_ch30_787-812.indd 803 10/06/15 10:57 AM
Most tax-exempt debt is relatively low risk, and is often backed by an insurance policy,
which promises to pay out if the municipality is about to default.^24 However, in the turbulent
markets of 2008 even the backing of an insurance company did little to reassure investors, who
worried that the insurers themselves could be in trouble. The tax advantage of “munis” no
longer seemed quite so important and their yields have climbed above those on Treasuries.
(^24) Defaults on tax-exempts have been rare and for the most part have involved not-for-profit hospitals. However, there have been a
number of major defaults of tax-exempt debt. In 1983, Washington Public Power Supply System (unfortunately known as WPPSS or
“WOOPS”) defaulted on $2.25 billion of bonds. In 1994, Orange County in California also defaulted after losing $1.7 billion on its
investment portfolio. In 2011, Jefferson Country, Alabama, declared bankruptcy with $4.2 billion in municipal debt. The record for
municipal bankruptcies is held by Detroit, which filed for bankruptcy in 2013 with $18 to 20 billion of debt.
Investment Borrower
Maturities
When Issued Marketability
Basis for
Calculating
Interest Comments
Treasury bills U.S. government 4 weeks, 3 months,
6 months, or 1 year
Excellent
secondary market
Discount Auctioned weekly
Government agency
and GSE benchmark
bills and discount
notes
“Ginnie Mae,”
“Fannie Mae,”
“Freddie Mac,” etc.
Overnight to 360
days
Very good
secondary market
Discount Benchmark bills
by regular auction;
discount notes sold
through dealers
Tax-exempt municipal
notes
Municipalities,
states, school
districts, etc.
3 months to 1 year Good secondary
market
Usually interest-
bearing with interest
at maturity
Tax-anticipation
notes (TANs),
revenue anticipation
notes (RANs), bond
anticipation notes
(BANs), etc.
Tax-exempt variable-
rate demand notes
(VRDNs)
Municipalities,
states, state
universities, etc.
10 to 40 years Good secondary
market
Variable interest
rate
Long-term bonds
with put options to
demand repayment
Nonnegotiable time
deposits and
negotiable certificates
of deposit (CDs)
Commercial
banks, savings
and loans
Usually 1 to 3
months; also
longer-maturity
variable-rate CDs
Fair secondary
market for
negotiable CDs
Interest-bearing
with interest at
maturity
Receipt for time
deposit
Commercial paper (CP) Industrial firms,
finance companies,
and bank holding
companies; also
municipalities
Maximum 270
days; usually
60 days or less
Dealers or issuer
will repurchase
paper
Usually discount Unsecured
promissory note;
may be placed
through dealer or
directly with investor
Medium-term notes
(MTNs)
Largely finance
companies and
banks; also
industrial firms
Minimum 270 days;
usually less than
10 years
Dealers will
repurchase notes
Interest-bearing;
usually fixed rate
Unsecured
promissory note
placed through
dealer
Bankers’ acceptances
(BAs)
Major commercial
banks
1 to 6 months Fair secondary
market
Discount Demand to pay that
has been accepted
by a bank
Repurchase
agreements (repos)
Dealers in U.S.
government
securities
Overnight to about
3 months; also open
repos (continuing
contracts)
No secondary
market
Repurchase price set
higher than selling
price; difference
quoted as repo
interest rate
Sales of government
securities by dealer
with simultaneous
agreement to
repurchase
❱ TABLE 30.4^ Money-market investments in the United States.