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II I I I ,. 'I I I .1 I I I I I I I I I I Bond Anticipation Notes Perhaps the most widely used but least understood short term financing vehicle is the Bond Anticipation Note (BAN). Misunderstood because it is a poker hand that generally proves to be a winner if you can draw to an inside straight. Most commonly used by an issuer 'tAlo wants to take a gamble that interest rates will get better. Most commonly used 'tAlen short term rates are higher than or equal to long term rates. Human nature works against successful use of the BAN in the quest for lower borrowin:! costs. Why? Because when interest rates begin to fall the governing board says "Wait until rates go a little lower." When they begin to rise the same board says, "Let's wait 'till they get back to 'tAlere they were." Every board meeting is taken up with "should we or shouldn't we" discussion. The BAN is a very constructive financing vehicle if used properly in project financing. For example, issuer A, B, and C have formed an intergovernmental authority to build a treatment plant, but B's credit is better than A's or C's, so it wishes to issue its own bonds to finance its share of the construction. However, it just initiated a water rate increase and under the terms of its outstanding bond indenture, cannot issue enou;h bonds for its share of the Project for one year. To accommodate B, the Authority issues a BAN, payable in three years when the Project is expected to be complete. When the project is complete, the Authority issues IOn:! term bonds to repay its proportionate share of the BAN at maturity and B issues long term bonds for its proportionate share of the BAN. Another possible, thou;h sl ightl y riskier use of the BAN is as follows: / Conservancy District A wishes to build a hydro Project in conjunction with one of its storage projects. However, at present, Federal Tax Code provisions with respect to purchase and use of that power require that a non-exempt person cannot 3