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Capital appreciation bonds and the cost of borrowing

Author

Listed:
  • Temirlan T. Moldogaziev
  • Kenneth A. Kriz

Abstract

A Capital Appreciation Bond (CAB) is a financial instrument that is most attractive as a resource‐flow management instrument. It bridges multiple fiscal years for jurisdictions experiencing rapid growth, potentially stretching for decades, but may also be used by localities experiencing fiscal distress. Using debt issuance data by independent school districts in Texas, who utilized almost all such bonds in the state, we present empirical evidence that CABs are associated with both the service and fiscal pressure factors. We further observe that, though the threat from CABs in terms of borrowing costs may have been exaggerated, enacting limits on debt repayment ratios (ratio of payment size at maturity to premium size) was likely the right legislative intervention.

Suggested Citation

  • Temirlan T. Moldogaziev & Kenneth A. Kriz, 2023. "Capital appreciation bonds and the cost of borrowing," Public Budgeting & Finance, Wiley Blackwell, vol. 43(2), pages 27-52, July.
    • Handle: RePEc:bla:pbudge:v:43:y:2023:i:2:p:27-52
    DOI: 10.1111/pbaf.12338
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    References listed on IDEAS

    as
    1. Rachel Weber, 2010. "Selling City Futures: The Financialization of Urban Redevelopment Policy," Economic Geography, Clark University, vol. 86(3), pages 251-274, July.
    2. Tima T. Moldogaziev & Sharon N. Kioko & W. Bartley Hildreth, 2017. "Impact of Bankruptcy Eligibility Requirements and Statutory Liens on Borrowing Costs," Public Budgeting & Finance, Wiley Blackwell, vol. 37(4), pages 47-73, December.
    3. Mary H. Harris & Vincent G. Munley, 2011. "The Impact of Debt Limitations and Referenda Requirements on the Cost of School District Bond Issues," Education Finance and Policy, MIT Press, vol. 6(4), pages 537-556, October.
    4. Rachel Weber, 2010. "Selling City Futures: The Financialization of Urban Redevelopment Policy," Economic Geography, Taylor & Francis Journals, vol. 86(3), pages 251-274, July.
    5. Jayaraman Vijayakumar & Kenneth Daniels, 2006. "The Role and Impact of Financial Advisors in the Market for Municipal Bonds," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(1), pages 43-68, August.
    6. Robert L. Bland, 1987. "The interest cost savings from municipal bond insurance: The implications for privatization," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(2), pages 207-219.
    7. Tima T. Moldogaziev & Martin J. Luby, 2016. "Too Close for Comfort: Does the Intensity of Municipal Advisor and Underwriter Relationship Impact Borrowing Costs?," Public Budgeting & Finance, Wiley Blackwell, vol. 36(3), pages 69-93, September.
    8. Tima T. Moldogaziev & Robert A. Greer & Jekyung Lee, 2019. "Private Placements and the Cost of Borrowing in the Municipal Debt Market," Public Budgeting & Finance, Wiley Blackwell, vol. 39(3), pages 44-74, September.
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