What is a Bond Anticipation Note?

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, we will discuss bond anticipation notes which are bonds issued by government entities where the security of the bond payments (interest and principal) is secured by an anticipated bond issuance.

TV Stand

Imagine you are out with a friend shopping. You have no money but you agreed to accompany your friend as he buys a TV. Your friend settles on a TV but it comes with a TV stand that he doesn't need. You do need a stand, however, so you come to an agreement where he will buy the TV and then sell you the stand for $200. You promise to pay him the $200 in 2 weeks because that is when you will receive the proceeds of a bank loan. The bank is giving you a loan of $10,000 to help you pay for a new car, and the cost of the car is only $8,000. You have $2,000 to pay 'additional costs.' The $200 payment can be included in the 'other costs.' Your friend knows about the loan. He was there when you signed it, so he agrees to buy the TV in anticipation of the loan you will receive.

This simple example describes, in essence, what a bond anticipation note is. You issue essentially an IOU (bond) of $200 which you will pay with another loan (or bond). In this lesson, we'll go into further detail about bond anticipation notes, which are also known as BANs.

Definition

A bond anticipation note (BAN) is a municipal bond whose payments (interest and principal payments) are secured by a future bond issuance. Usually, BANs are short-term (less than 1 year). They are issued if the town or city needs cash now and has already established that they will issue a new bond in the future. Generally, the new bonds are a long-term bond (> 5 years).

Governments often have a temporary cash need because their revenue from tax collection is sporadic throughout the year. Property taxes, for example, may be collected monthly, but some entities collect them quarterly or semi-annually. But, government expenses are constant throughout the year. This requires the government to spread their tax collection proceeds over the course of the year. If that spreading is insufficient, the town or city may issue a BAN to fill the financial gap.

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