Bond 101

A bond is like a loan. The organization that sells a bond is known as the issuer (HISD). Think of it as an IOU given by an issuer (HISD) to a lender (the investor).

School Districts, by law, are limited to the different types of debt they can issue.

Bonds typically have a lower interest rate than a traditional bank loan.

Bonds can be issued for up to 40 years (a typical long-term bond is between 20-30 years).

Banks typically do not lend money for 30 years (usually 5-10 year bonds only) and do not lend more than $10 million in a year to government agencies.

Maturity indicates the life of the bond. Most bonds have maturity ranging from 3 months to 40 years. The date on which the issuer has to repay the amount borrowed is called the maturity date and the amount borrowed is known as the par value.

The issuer of a bond (HISD) must pay the investor something extra for the privilege of using his or her money. This "extra" comes in the form of interest payments, which are made at a predetermined rate and schedule.

A bond’s interest rate is determined when the issuer (HISD) sells the bond in the market. The main factor that influences the bond’s interest rate, is the rate an investor can earn in the current market.

General Obligation bonds are secured by property taxes. Bond proceeds are used for the construction of school facilities, the acquisition of facilities and land, equipping of school buildings, refinancing of property, and the purchase of new school buses.

Generally, school district bonds mature as serial bonds. Serial bonds mean that the principal is repaid in periodic installments over the life of the issue. If a bond measure has passed, HISD may issue bonds in increments and not the full bond package all at once.

In a refunding transaction, new debt is issued to provide monies to pay principal and interest on old, outstanding debt as it becomes due, until the debt can be prepaid (“Call Date”). Refunding is used for a variety of reasons: take advantage of lower interest rates, revise payment schedules, remove or modify restrictions contained in the old debt agreements.

An issuer’s (HISD) credit rating is evaluated according to its ability to make timely principal and interest payments to bondholders. Bonds are evaluated for credit risk based on the financial performance of the issuer, both past and present. This is why a district should maintain a strong fund balance and pay debt down when it became due.