yield burning

Yield burning

A municipal bond financing method. Underwriters in advance refundings add large markups on US Treasury bonds bought and held in escrow to compensate investors while waiting for repayment of old bonds after issuance of the new bonds. Since bond prices and yields move in opposite directions, when the bonds are marked up, they "burn down" the yield, which may violate federal tax rules and diminishes tax revenues.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Yield Burning

The practice of an investor deliberately attempting to raise the price of a bond in order to reduce its yield. Because the reduction of yield reduces the tax owed on the bond, yield burning is illegal.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

yield burning

Marking up the prices by underwriters and thereby reducing, or burning, the yields of bonds to be placed in escrow as part of a municipal bond refunding. Yield burning benefits the underwriters at the expense of their clients.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
He describes some of its eccentricities, such as the market's lack of a reaction to bad news, the prevalence of "yield burning" in the early years, and the evolution of regulation within the market.
After four years of investigations, litigation, and negotiations over yield burning, the SEC, Justice Department, IRS reached a settlement with Lazard Freres & Co.
The SEC's Chairman hailed the settlement as a milestone in the federal effort to combat yield burning "in a way that protects innocent municipalities and bondholders," adding that "a dark cloud has been lifted from the municipal securities market." (Source: The Bond Buyer, April 7, 2000.)
The regulations are aimed at putting a stop to what the IRS and Securities and Exchange Commission (SEC) term "yield burning." The two federal agencies believe this occurs when a city, as part of an advance refunding, or refinancing tax-exempt debt before the first call date of the original tax-exempt bonds, invests the proceeds of the new municipal tax-exempt bonds in U.S.
Thomas Dubbs, attorney for Collier County, Florida, discussed yield burning. Collier County, Florida, is the named plaintiff on a yield burning class-action suit.
Often the yield burning rooked the city and its taxpayers.
Since the summer of 1996, state and local government issuers have faced the prospect of being compelled to enter into closing agreements with the Internal Revenue Service (IRS) to protect the tax-exempt status of advance refundings because of possible overpricing by bond underwriters - yield burning - in connection with the investment of the advance refunding bond escrows.
Schwartz was referring to the federal government's landmark, global settlement to protect cities and their municipal bondholders in a major yield burning case.
In what could be a major breakthrough for cities and towns, the federal government last week reached a global settlement to protect cities and their municipal bondholders in a major yield burning case.
The overpricing of open-market investments purchased for tax-exempt advance refunding bond escrows is commonly referred to as yield burning. Federal law places yield restrictions on the investment of tax-exempt bond proceeds that expressly prohibit overpricing practices.
That authority is part of what is at issue in the yield burning cases involving billions of dollars of outstanding municipal tax-exempt bonds and IRS threats to declare those bonds taxable.
As of mid-December 1996, the site contained proposed regulatory changes on arbitrage restrictions that would address the practice of "yield burning," the practice of pricing securities to artificially reduce their yield.