Belton, MO - Debt Structuring
Feb 23, 2025
This is a problem set from the UChicago Harris School’s Public Capital Markets Credential, which was hosted in Beijing, China, and co-sponsored by the Central University of Finance and Economics. Led by Professor Justin Marlowe, the program equips participants with essential analytical skills for public finance officials, including bond valuation, credit analysis, debt structuring and issuance strategies, and financial sustainability assessment.
Overview
This post outlines the analysis of the City of Belton, Missouri’s bond issuance, a $15.25 million, AA- rated general obligation bond. The goal of the analysis is to:
- Calculate the total debt service over the bond’s life.
- Compute the True Interest Cost (TIC) using the bond’s pricing data.
- Analyze the unreserved general fund balance ratio and debt per capita.
The document from which this analysis is sourced is available here and is included at the bottom of this post.
This analysis provides insights into the city’s debt management, fiscal health, and the bond’s appeal for investors. This is essential for understanding the city’s ability to manage debt obligations and maintain creditworthiness, which is critical for both municipal management and bond investors.
Question 1: Total Debt Service Analysis
Question:
What is the total amount of debt service Belton will pay over the life of the bonds?
Answer:
The total debt service that the City of Belton will pay over the life of the bonds is $20,536,662.50 (unless the bonds are called early). This includes both principal repayments and interest payments over the bond’s 16-year term.
Key Concepts:
- Debt Service: The total of principal and interest payments the issuer must make to service the debt.
- Principal Repayment: The original borrowed amount paid off over the bond’s life.
- Interest Payment: The cost of borrowing, based on the coupon rate applied to outstanding principal.
- Coupon Rate: The fixed interest rate on the bond, used to calculate the interest payments.
Mathematical Framework:
For each period \(t\), the Interest Payment \(I_{t}\) is computed as: \(I_{t} = \sum_{i=t}^{n} \frac{C_{i} \times r_{i}}{2}\) Where: \(C_{i}\) = Principal outstanding at time \(i\), \(r_{i}\) = Coupon rate for year \(i\), The factor \(\frac{1}{2}\) is due to semi-annual interest payments.
Total Debt Service for each period \(t\) is then: \(\text{TDS}_{t} = P_{t} + I_{t}\) Where \(P_{t}\) is the principal repayment in year \(t\).
Debt Service Schedule Spreadsheet Calculation:
Interest = SUMPRODUCT(Principal_Range, Coupon_Range)
Total_Debt_Service = Principal + Interest
| Year | Maturity | Principal ($) | Coupon (%) | Price | Yield (%) | Interest ($) | Total DS ($) |
|---|---|---|---|---|---|---|---|
| 1 | 03/01/26 | 1,330,000 | 5.25 | 102.549 | 2.73 | 702,325 | 2,032,325 |
| 2 | 03/01/27 | 1,020,000 | 5.25 | 104.909 | 2.75 | 632,500 | 1,652,500 |
| 3 | 03/01/28 | 1,000,000 | 5.25 | 107.136 | 2.78 | 578,950 | 1,578,950 |
| 4 | 03/01/29 | 1,050,000 | 5.25 | 109.241 | 2.81 | 526,450 | 1,576,450 |
| 5 | 03/01/30 | 850,000 | 5.25 | 111.178 | 2.85 | 471,325 | 1,321,325 |
| 6 | 03/01/31 | 850,000 | 5.25 | 113.157 | 2.86 | 426,700 | 1,276,700 |
| 7 | 03/01/32 | 975,000 | 5.25 | 115.059 | 2.87 | 382,075 | 1,357,075 |
| 8 | 03/01/33 | 960,000 | 5.25 | 114.511 | 2.95 | 330,887.50 | 1,290,887.50 |
| 9 | 03/01/34 | 970,000 | 4.25 | 106.825 | 3.16 | 280,487.50 | 1,250,487.50 |
| 10 | 03/01/35 | 965,000 | 3.25 | 99.152 | 3.35 | 239,262.50 | 1,204,262.50 |
| 11 | 03/01/36 | 940,000 | 4.00 | 104.169 | 3.33 | 207,900 | 1,147,900 |
| 12 | 03/01/37 | 920,000 | 4.00 | 103.787 | 3.39 | 170,300 | 1,090,300 |
| 13 | 03/01/38 | 880,000 | 3.625 | 99.741 | 3.65 | 133,500 | 1,013,500 |
| 14 | 03/01/39 | 830,000 | 4.00 | 102.652 | 3.57 | 101,600 | 931,600 |
| 15 | 03/01/40 | 860,000 | 4.00 | 101.966 | 3.68 | 68,400 | 928,400 |
| 16 | 03/01/41 | 850,000 | 4.00 | 101.223 | 3.80 | 34,000 | 884,000 |
| Total | 15,250,000 | 5,286,662.50 | 20,536,662.50 |
Significance
This calculation allows municipal finance officers to understand the full cost of borrowing and plan for future budget allocations required to meet these obligations. Debt service schedules directly impact a municipality’s operating budget, determining how much of annual revenue must be allocated to debt payments versus other essential services.
Question 2: True Interest Cost (TIC)
Question:
Compute the True Interest Cost (TIC) using the bond’s pricing information.
Answer:
The True Interest Cost (TIC) for the bonds is 3.400%, assuming the bonds are not called early. This is computed by finding the internal rate of return (IRR) that equates the present value of future debt service payments to the bond proceeds.
What is TIC?
True Interest Cost is the internal rate of return (IRR) that equates the present value of all future debt service payments to the initial bond proceeds. Unlike simple interest rates, TIC accounts for:
- The time value of money
- Premium or discount pricing
- Issuance costs (if applicable)
Significance
TIC provides a comprehensive measure of borrowing costs and enables:
- Comparison across bond issues: By comparing the TIC of Belton’s bond issue with other AA- rated municipal bonds issued around the same time, we could determine if Belton secured competitive financing terms.
- Evaluation of market timing: The difference between Belton’s TIC and prevailing market rates for similar bonds indicates whether the city timed its issuance advantageously.
- Assessment of credit rating impact: The spread between Belton’s TIC and rates for higher or lower-rated municipalities quantifies the value of its AA- credit rating.
Mathematical Framework:
The TIC is calculated using the equation: \(0 = I_{0} + \sum_{t=1}^{n} \frac{CF_{t}}{(1 + \text{TIC})^{t}}\) Where: \(I_{0}\) = Initial bond proceeds, \(CF_{t}\) = Cash flows (debt service payments).
The initial payment \(I_{0}\) is calculated as: \(I_{0} = P \times \text{Price} \times 0.01\)
TIC Spreadsheet Calculation:
Initial_Payment = Principal × Price × 0.01
TIC = IRR(Initial_Payment, -Total_Debt_Service_Array)
| Year | Initial Payment ($) | Debt Service ($) | Net Cash Flow ($) |
|---|---|---|---|
| - | - | - | 16,174,426.15 |
| 1 | 1,363,901.70 | 2,032,325.00 | (2,032,325.00) |
| 2 | 1,070,071.80 | 1,652,500.00 | (1,652,500.00) |
| 3 | 1,071,360.00 | 1,578,950.00 | (1,578,950.00) |
| 4 | 1,147,030.50 | 1,576,450.00 | (1,576,450.00) |
| 5 | 945,013.00 | 1,321,325.00 | (1,321,325.00) |
| 6 | 961,834.50 | 1,276,700.00 | (1,276,700.00) |
| 7 | 1,121,825.25 | 1,357,075.00 | (1,357,075.00) |
| 8 | 1,099,305.60 | 1,290,887.50 | (1,290,887.50) |
| 9 | 1,036,202.50 | 1,250,487.50 | (1,250,487.50) |
| 10 | 956,816.80 | 1,204,262.50 | (1,204,262.50) |
| 11 | 979,188.60 | 1,147,900.00 | (1,147,900.00) |
| 12 | 954,840.40 | 1,090,300.00 | (1,090,300.00) |
| 13 | 877,720.80 | 1,013,500.00 | (1,013,500.00) |
| 14 | 852,011.60 | 931,600.00 | (931,600.00) |
| 15 | 876,907.60 | 928,400.00 | (928,400.00) |
| 16 | 860,395.50 | 884,000.00 | (884,000.00) |
| Total: | 16,174,426.15 | TIC: | 3.40017155% |
Question 3: Fund Balance Analysis
Question:
For FY23, identify Belton’s unreserved general fund balance as a percent of total general fund expenditures, and total debt per capita.
Answer: The unreserved general fund balance is 24.445% of total general fund expenditures, and the debt per capita is 3.370.89.
Mathematical Framework:
- Fund Balance Ratio: \(\text{FB Ratio} = \frac{\text{Unreserved Fund Balance}}{\text{Total General Fund Expenditures}} \times 100\)
- Debt per Capita: \(\text{Debt per Capita} = \frac{\text{Total Debt}}{\text{Population}}\)
Definitions and Significance:
- Unreserved Fund Balance Ratio: This metric measures financial flexibility—the portion of annual expenditures the city could cover from undesignated reserves. While there is no universal “correct” ratio, the Government Finance Officers Association (GFOA) recommends maintaining at least 16.7% (two months) of operating expenditures in reserves. Belton’s 24.45% ratio indicates:
- The city has a healthy amount of liquidity (reserves), which could cover about a quarter of its total expenditures.
- The city can weather unexpected revenue shortfalls or unforeseen expenses without needing to take on additional debt or emergency measures. Without comparable data from peer municipalities or historical trends, we cannot conclusively state whether this level is optimal, but it exceeds minimum recommended guidelines.
- Debt per Capita: Measures the debt burden distributed across the population. This metric helps bondholders assess the municipality’s capacity to generate tax revenue to service debt, and helps administrators evaluate debt affordability for their citizen base. The significance of Belton’s $3,370.89 figure depends on:
- Comparison to national and regional averages of cities with similar charaacteristics.
- Consideration of the city’s per capita income and property values.
- Analysis of the trend with respect to other local economic conditions.
Limitations
This analysis provides a snapshot of Belton’s current position but would benefit from:
- Trend analysis over multiple years
- Comparison with peer municipalities of similar size and credit rating
- Analysis of revenue sources and stability
Value of Municipal Bond Analysis
Understanding municipal bond mathematics is valuable for several stakeholders:
- For bond investors: Investors use these metrics (debt service, TIC, and fund balance ratio) to gauge the city’s ability to service debt and its overall creditworthiness.
- For municipal managers: Understanding the total debt service and the financial flexibility provided by the fund balance enables the city to make informed decisions regarding new projects, capital investments, and future debt issuances.