BOND ANTICIPATION NOTE Meaning and
Definition
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A bond anticipation note (BAN) is a short-term debt instrument issued by a government or governmental entity to finance capital projects or infrastructure improvements. It is essentially a type of promissory note that is issued in anticipation of the future issuance of long-term bonds for funding these projects.
The purpose of a bond anticipation note is to provide immediate funding for the initial costs of a project while the municipality or governmental entity is in the process of securing long-term financing through the issuance of bonds. BANs typically have a maturity period of one to three years, after which they are retired using the proceeds from the sale of long-term bonds.
These notes are usually issued at a discount to their face value and do not pay periodic interest payments like traditional bonds. Instead, the interest is paid as part of the final maturity payment when the BAN is retired. The interest rate on a bond anticipation note is typically lower than that of long-term bonds due to its shorter-term nature.
Investors who purchase bond anticipation notes are compensated through the discount at which they are issued and the interest payment at maturity. The creditworthiness of the issuing government or entity is a significant factor in determining the interest rate and demand for these notes.
Overall, bond anticipation notes provide a temporary funding solution for governments and governmental entities as they await the completion of the long-term financing process, allowing them to begin capital projects or infrastructure improvements promptly.
