Bond Anticipation Note (BAN)

What Is a Bond Anticipation Note (BAN)?

A Bond Anticipation Note (BAN) is a short-term interest-bearing security issued in advance of a larger, future bond issue. Bond anticipation notes are smaller short-term bonds that are issued by corporations and governments, such as local municipalities, wishing to generate funds for upcoming projects.

Understanding Bond Anticipation Note (BAN)

A note is a debt instrument issued by a borrowing entity to raise funds in the short-term. Notes are interest-bearing securities, promising periodic interest payments to lenders and principal repayment at the end of the instrument’s term life. These payments are usually made from a defined revenue source. Notes usually mature in one year or less, although notes of longer maturities are also issued. One form of a note that is issued by a governmental body to fund its short-term need is a bond anticipation note.

Bond anticipation notes (BAN) are short-term debt securities issued by a municipal or state government to fund a new project. These notes are issued in anticipation of long-term financing which when issued is used to retire or pay off the BANs. A government that is due to commence work on a new project may decide to issue long-term bonds to finance the project. However, the issuance of these bonds may not be possible prior to the launch of the project due to certain legal, regulatory, or compliance procedures that could cause a delay in issuing new bonds. In order to proceed with work on the new project and to have the funds necessary to finance the project, the governmental issuer may decide to issue short-term bonds as a source of financing in the interim.

The issuing bodies use the bond anticipation notes as short-term financing, with the expectation that the proceeds of the larger, future bond issue will cover the anticipation notes. Bond anticipation notes may be used when the issuer wants to delay a bond issue, or if the issuer wishes to combine several projects into one larger issue. When the long-term bonds are issued, the proceeds are used to make the interest and principal payments on the bond anticipation notes. In effect, the payments on BANs are secured by a future long-term bond issuance. To put another way, a bond anticipation note is a municipal issue that borrows against the proceeds of an upcoming long-term bond issue.

Bond anticipation notes are often used as a means of kick-starting funding efforts for new projects, such as building highways, bridges, or sewage systems. Once the project is started, the larger bond issue may generate enough funds to cover the bond anticipation notes in a short period of time. Often, the notes are repaid within one year of issue.

BANs are considered money market securities and are rated by Moody’s Investment Grade (MIG). Bond anticipation notes are generally considered to involve a relatively low-risk exposure, and, due to their short time horizon, investors should evaluate the basis of the notes and determine if there will be enough momentum and interest in the project. Investors can find BAN opportunities through local brokers, municipalities, and other financial institutions.