DBC Finance and managing qualified school construction bonds

By: Kade Boone

Typically, a QSCB is a single maturity that matures in fifteen years and pays semi-annual interest. There is a federal subsidy on QSCBs that is equal to the interest on the bonds at a rate dictated by our government, which is usually at a five to a five-and-a-half percent rate. If the bond rate is greater than subsidy rate, the issuer receives the entire subsidy rate; but if the bond rate is lower the issuer, only receives the bond rate.

Setting up QSCBs in DBC Finance is fairly simple and starts with creating a negative expense that computes the greater of negative bond interest off the bonds and negative bond interest at the published QSCB subsidy rate. The interest can be computed off the entire issue or off a particular bond.

After creating an expense, a fund is also needed in order to create a sinking fund. It’s more economical if the issuer puts money annually into a sinking fund and invests at a rate that’s greater than the net bond rate and the sinking fund pays off the principal that matures off the QSCB.

Creating a sinking fund, like creating a negative expense, is also easily accomplished in DBC Finance. The fund is net funded (GIC) with the interest rate and incoming cash flow rate entered to the QSCB sinking fund and bond principal set as the draw formula. One final expense is created that internally deposits to the sinking fund and is based off a percentage paid annual in arrears, which in turn is based off an estimate of the equal annual sinking fund deposit made by the issuer.

By creating only one sinking fund and two separate expenses, the Qualified School Construction Bond is just one type of bond that can easily be constructed in DBC Finance.

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