Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Anticipation Note

What it is:

An anticipation note is a short-term note that a state or local government issues and expects to repay with imminent tax receipts, another bond issue or some other form of revenue.

How it works (Example):

Town XYZ wants to purchase a new building to replace the old City Hall. The building costs $10 million. Town XYZ expects to pay $5 million cash for the building but needs to raise another $5 million. It expects to receive at least that much next April after the annual property tax filing deadline has passed, but the real estate deal is scheduled to close six months before that date, in October.

Because of this timing situation, Town XYZ issues $5 million of tax anticipation notes that mature in May. Tax anticipation notes are a type of anticipation note (and a type of municipal bond), and so investors are generally able to obtain interest tax-free. The notes pay buyers 5% interest per year. (Remember, however, that the notes will be outstanding for less than one year.)

Town XYZ is then able to purchase the building for $10 million in October. When April arrives, Town XYZ has its property tax receipts and uses a portion of them to repay the anticipation notes.

Why it Matters:

Anticipation notes provide state and local governments with a way to stabilize cash inflows and outflows during the year. In turn, this allows governments to proceed with capital projects immediately rather than waiting to have the actual cash in hand.