How Are Bond-Fund Investments Valued Under an Indenture?

An indenture's valuation provisions decide which number each fund's investments carry for each test the contract runs, and they come from two layers: the bond contract's own terms, and the federal arbitrage rules, which add valuation bases of their own.

The MSRB glossary defines an indenture as a contract between the issuer and a trustee for the benefit of the bondholders, setting out the parties' rights, duties and remedies and the exact nature of the security for the bonds.

Many governmental issues, especially general obligation bonds, may not use an indenture at all, the same glossary notes, and where there is none GFOA recommends an investment policy listing the permitted investments for proceeds, possibly a subset of the list for operating funds.

Each of the bond funds a closing creates carries its own investment terms, the wider framework for investing bond proceeds reaches beyond any one document, and what indentures say about investing generally has its own bond indenture guide.

Do fund investments get valued at par or at market value?

Neither value covers every test: fair market value is the bid standard when tax or state law requires it, present value generally governs yield-restricted holdings, a guaranteed investment contract carries a specifically negotiated interest rate, and tri-party repo collateral carries a daily market mark.

For bids, GFOA's best practice recommends that a bond-proceeds investment policy ensure fair market value bids are received when tax law and state or local laws require them.

The SEC's bid-rigging cases show what fails when that price-setting breaks down: as of December 23, 2011, the agency reported more than $743 million recovered from financial institutions in these settlements and 18 individuals indicted or having pled guilty, and said the corruption deprived municipalities of a conclusive presumption that reinvestment instruments were purchased at fair market value.

After purchase the tax rules set the basis for yield: Treasury Regulation §1.148-5(d)(2) generally requires yield-restricted nonpurpose investments to be valued at present value, and §1.148-5(b)(2)(i) computes yield separately for each class of investments, blending yields within a class but not across classes.

Treasury Regulation §1.148-5(b)(3) adds a deeming rule for time: investments held past a temporary period may be treated as purchased at fair market value at the end of the period.

The benchmark they are tested against has its own computation: for a fixed-yield issue, Treasury Regulation §1.148-4(b)(1)(i) defines yield as the discount rate that equates the present value of all unconditionally payable principal, interest and qualified-guarantee fees with the issue price as of the issue date, with certain qualified-hedge amounts included.

The tax perimeter is also wide: 26 CFR 1.148-1(e)(1) says investment-type property generally includes any property held principally as a passive vehicle for the production of income, including any benefit based on the time value of money, and certain prepayments create investment-type property under §1.148-1(e)(2), with exceptions such as a prepayment within 90 days of expected delivery.

Book value belongs to a different setting: in retirement plans, stable value contracts are bank or insurer wraps that pay plan participants at book value if a stable value fund's market value falls short, as the joint CFTC and SEC release that studied them describes, and that is a different product and regulatory setting from bond-proceeds investment agreements.

Where yield restriction comes from and when it applies is its own subject.

When are a fund's investments valued?

Valuation lands on the dates each rule attaches it to: the bid date, the daily margin cycle for tri-party collateral, an early-redemption date, and the dates the arbitrage computation reaches.

Tri-party repo collateral runs on the shortest clock: New York Fed staff research describes tri-party clearing banks providing collateral management services such as daily revaluation of assets, daily remargining of collateral and allocation of the borrower's collateral to its lenders.

The amount by which collateral value exceeds the cash advanced is the haircut, and bilateral repos typically settle delivery versus payment.

Early redemption is the second date: for subscriptions on or after October 28, 1996, 31 CFR 344.6(d) says a SLGS Time Deposit redeemed early has its remaining interest and principal payments discounted by the current Treasury borrowing rate for the remaining term to maturity, which may result in a premium or a discount to the issuer.

Zero-interest Time Deposits are redeemed at principal with no market charge, while older subscriptions sold between 1976 and 1996 use the market-charge formulas in 344.6(e) and (f).

The rule also attaches a condition to the proceeds that come back: the redemption certification bars reinvesting them above the yield used to price the redemption, at 344.2(e)(2)(ii).

The tax rules add dates of their own: the rule that may treat holdings past a temporary period as purchased at fair market value at the period's end under §1.148-5(b)(3), and the convention treating bonds subject to mandatory or expected early redemption as redeemed on that date under §1.148-4(b)(2).

SLGS subscriptions day to day are covered in the SLGS guide, and repo margin mechanics in the repo collateral guide.

Why do investment agreements simplify reserve fund valuation?

It starts with the contract: a guaranteed investment contract's interest rate and withdrawal or reinvestment provisions are specifically negotiated in the agreement itself, while how a given indenture values that agreement for a reserve test is a reading for bond counsel.

The reserve fund is where this shows up most: the MSRB glossary describes a debt service reserve fund as one used to pay debt service if pledged revenues fall short, with the requirement often a fixed percent of par or maximum annual debt service, and the fund's size and investments generally subject to the arbitrage rules.

A requirement written against par or debt service is a stable target, and Treasury Regulation §1.148-1(b) defines the contract type with a negotiated rate: for arbitrage purposes a guaranteed investment contract includes any nonpurpose investment with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate.

Whether a particular repurchase agreement or forward delivery agreement falls within that definition is a determination for bond counsel.

The contrast makes the simplification visible: tri-party repo collateral is revalued and remargined daily by the clearing bank, a SLGS Time Deposit subscribed on or after October 28, 1996 and redeemed early is priced by discounting its remaining payments, and yield-restricted nonpurpose investments are generally valued at present value for the tax computation.

What the product looks like in a solicitation is covered in the guaranteed investment contract guide, reserve fund investing in the debt service reserve fund guide, and the agreement versus owned-securities choice in the agreement vs securities guide.

Who decides which valuation basis applies?

The bond documents negotiated for the issue set the contractual basis, and the arbitrage regulations add the tax bases.

A municipal advisor drawn into the question carries duties of its own: the suitability provision of the MSRB's standards of conduct rule, in paragraph (d), requires an advisor recommending a transaction or product to have a reasonable basis to believe it is suitable for the client and to tell the client its evaluation of the material risks and benefits, the basis for suitability, and whether it considered other reasonably feasible alternatives.

The same duties apply when the client asks the advisor to review another party's recommendation within the engagement's scope.

mGIC is an independent, SEC-registered municipal advisor and Bidding Agent that helps issuers structure, competitively bid and close investments of bond proceeds, selling none of the products it evaluates.

To have a fund's valuation provisions read against its objectives, permitted investments and draw schedule, contact mGIC for a free, no-obligation reinvestment review.

Final determinations about what an indenture's valuation provisions mean for a particular issue belong to bond counsel and tax counsel.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.