During the last 10 years, U.S. municipalities and not-for-profit organizations have issued more than $1 trillion in tax-exempt variable rate securities. Cash flows from these securities often closely track the SIFMA index. SIFMA itself tends to hold a relationship to the London Interbank Offered Rate (LIBOR) driven largely by top federal marginal tax rates. Motivated in part by the widespread use of LIBOR indexed derivatives to hedge tax-exempt variable rate bonds, this paper explores the historical SIFMA and LIBOR series and suggests methods for simulating these rates into the future for purposes of debt portfolio risk analysis, and simulation based debt structuring.
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