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Abstract: 

In the 1970s, academics were suggesting that it may be costly for municipalities to sell bonds competitively using the net interest cost (net present value method) bid evaluation and that in order to avoid excess interest costs municipalities should either use the true interest cost (an internal rate of return method) bid evaluation or impose coupon constraints when using the NIC method. The purpose of this study is to discover whether the recommendations of more than 20 years ago have been sufficiently heeded by municipal market participants. Certainly a much larger portion of issuers is using the TIC method than used it 20 years ago. Since more than 60 percent of issuers continue to evaluate bids on a NIC basis, it makes sense to ask whether these bond issues are still more costly to issuers than those that are sold on a TIC basis. Are the NIC issuers using coupon constraints that reduce or eliminate the excess interest costs, or is there some portion of the NIC issuers that is still subjecting itself to excess interest costs because of the failure to properly constrain the bids of underwriters?

Keywords: Net interest cost (NIC) bid evaluation; true interest cost (TIC) bid evaluation

Affiliations:  1: Western Washington University.