Premium
Measuring Municipal Borrowing Costs: How Missing Cost Information Biases Interest Rate Calculations
Author(s) -
Simonsen Bill,
Robbins Mark D.
Publication year - 2002
Publication title -
public budgeting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.694
H-Index - 30
eISSN - 1540-5850
pISSN - 0275-1100
DOI - 10.1111/1540-5850.00065
Subject(s) - issuer , measure (data warehouse) , debt , bond , municipal bond , interest rate , business , economics , actuarial science , finance , computer science , database
State and local governments issue billions of dollars’ worth of municipal bonds every year. At the same time, no single comprehensive measure has been available for debt managers to apply that fully captures their borrowing costs. In this article we compare a comprehensive measure called the internal financing rate with true interest cost (TIC), applying both to bond sales in Oregon in 1999. We find that the two measures produce statistically and practically different results and conclude that TIC typically understates the real cost of borrowing experienced by issuers. TIC is therefore a flawed measure for reporting results to administrators, elected officials, and the public. It is also an inappropriate measure for evaluating the performance of public debt managers.