The purpose of our research is to developan algorithm that optimally schedules municipaldebt redemptions. It is our hypothesis thatsegmented investor demand, the existing termstructure, the temporal behavior of municipalproject revenues and reinvestment opportunitiesfor interim revenue surpluses are all factorswhich should impact the optimal debt schedulingproblem in a unique and economically meaningfulway. For example, investor preference for shortermaturities and an upward sloping term structureof interest rates should, ceteris paribus,increase the proportion of debt scheduled to berepaid early in the redemption horizon. Ifinvestor demand is limited to a relatively smallgeographic area, such limited demand should bereflected in higher yields. If municipal projectrevenues increase over time then a largerproportion of the debt should be scheduled to beredeemed later. Unfortunately, realisticacknowledgements of the nature of the municipaldebt financing problem create an objectivefunction and a set of constraints which are fartoo complex to yield simple reduced formpresentations of the optimal principalredemptions. Consequently, solutions to theoptimal debt schedule and tests of theconjectures articulated above weresimulated.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Oct 3, 2004
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