Net Interest Cost, True Interest Cost, All-In True Interest Cost

Colorado Statutory Rules:

For purposes of Article 1, Title 32 of the C.R.S.:

“Net effective interest rate” = “Net interest cost” of the bonds / SUM[(principal amount of bonds maturing on maturity date 1 * number of years from their date to that maturity date) + (principal amount of bonds maturing on maturity date 2 * number of years from their date to that maturity date) + (etc.)]

Net effective interest rate must be calculated without regard to any option of redemption price to the designated maturity dates of the bonds.

“Net interest cost” = Total amount of interest to accrue on the bonds from their date to their respective maturities, less the amount of any premium or plus the amount of any discount.  Net interest cost must be calculated without regard to any option of redemption prior to the designated maturity dates of the securities.  In other words, net interest cost is the total interest less the amount of premium or plus the amount of discount.

For purposes of Article 90, Title 24 of the C.R.S.:

“Net effective interest rate” means the net interest cost of securities divided by the sum of the products derived by multiplying the principal amount of the securities maturing on each maturity date by the number of years from their date to their respective maturities.  In all cases, the net effective interest rate shall be computed without regard to any option of redemption prior to the designated maturity dates of the securities.

The “net interest cost” concept is applicable in the following state law circumstances:

  • Refundings under the Public Securities Refunding Act (see 11-56-104, -105, -106, -107, C.R.S.)
  • Colorado Recovery and Reinvestment Finance Act of 2009 (see 11-59.7-105, C.R.S.)
  • Refunding bonds for schools (see 22-43-103, -105, C.R.S.)
  • Refunding bonds for postsecondary education/junior colleges (see 23-71-603, -605, C.R.S.)
  • Refunding bonds for counties (see 30-35-703, C.R.S.)
  • Refunding bonds for municipalities (see 31-21-203, C.R.S.)

Other Related Matters:

The interest payment to investors and the underwriter’s profit together comprise Net Interest Costs, which is the usual measure of bond financing costs. For example, if an underwriter purchases a bond issue at an interest rte of 9.4 percent, and resells (“reoffers”) it to the final investor for 9.1 percent, the NIC is composed of an interest cost of 9.1 percent and an underwriter’s profit or spread of 0.3 percent.

“True interest cost” (TIC) = Par value + accrued interest + premium – discount – underwriter’s discount (but not costs of issuance and not other amounts) = target value for present value calculation.  Figure the yield at which the present values of the payments made on the bonds equal this target value.

“All-in true interest cost” (All-In TIC) = Par value + accrued  interest + premium – discount – underwriter’s discount – costs of issuance – other amounts = target value for present value calculations.

“Arbitrage yield” (Arb Yield) = Par value + accrued interest + premium – discount = target value for present value calculations.  Because none of the expenses are deducted for purposes of coming up with the arbitrage yield, the arbitrage yield necessarily is lower than the TIC or All-In TIC.

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