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Overview of Tender Option Bonds (TOBs)
TOBs are synthetically created short-term tax exempt instruments. A TOB sponsor will buy a portfolio of fixed rate, long term municipal bonds with ratings between AA-AAA and combine them with an interest rate swap to create short term tax exempt floating rate bonds. (Please see attachment 1 for a summary of the deal structure).

The tax-exempt status creates a high level of demand particularly from investors who seek tax exempt cash flow as a source of annual income and revenue. The buyers of TOBs are for the most part money market mutual funds. Money market mutual funds are guided by certain regulations as to what type of bonds they can have in their portfolio. Specifically, the underlying municipal bonds must be rated at least AA-. The maximum maturity of the municipal bonds is thirteen months and the average weighted maturity of a money market fund's tax exempt bond portfolio must be no longer than 50 days. This compares to typical......

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