Capital Appreciation Bonds: The Creation of a Toxic Waste Dump in Our Schools

Capital Appreciation Bonds are a relatively new phenomenon, created as a result of declining property values and the need for increasing amounts of funding by school districts. These bonds are similar to zero coupon bonds and not the more typical current interest bond. They are issued for periods well in excess of the normal 25 year municipal bond. A normal payback for a municipal bond is 2 to 3 times the amount borrowed by the municipal bond issuer. This paper explores the consequences of having issued these capital appreciation bonds for a 40 year period frequently with no insurance, on a non- callable basis with no sinking fund and compounding deferred interest resulting in a payback of 3.5 to 23.4 times the amount borrowed. Effectively this passes on the debt to a new generation and imposes on that generation the consequences of a probable default.