COSTS TO MUNICIPALITIES OF SELLING BONDS BY NIC

Abstract

State and local governments ty award their new bonds sold competitively on the basis of NIC (net interest cost). This interest rate measure does not assign time value to money and results in higher interest cost bids than necessary. The present value cost of such excess interest payments on the $17 billion of municipal bonds sold competitively in 1973 is estimated at near $20 million. These costs can be reduced or eliminated altogether by either prescribing appropriate constraints on bonds awarded by NIC or by awarding bonds by TIC (true interest cost or internal rate of return).