Question

The University of Kentucky Builds with Bonds

Every year, hundreds of colleges around the country build new buildings. Where do most schools get the money for these expensive projects? From long-term bonds.   

The University of Kentucky (UK) has issued “revenue” bonds to build buildings on the 23,000 student Lexington campus, and on 14 community colleges throughout the state. These bonds pledge the school’s revenues as collateral to guarantee payment of the bonds. At one time the outstanding debt on the Lexington campus buildings was $137 million. The total debt on the community college buildings equaled $121 million. The bonds generally have maturities ranging from 10 to 20 years.

Additional “guarantees” for bond purchasers are the ratings given the bonds by professional rating agencies. Their bonds are rated “AA-“ by Standard & Poor’s Corporation, which is well above investment grade. Thee is always a very good market for the bonds.

People in Kentucky identify very closely with the university. Even though the bonds are rated “AA-” they trade at AAA (the top bond rating) because they are so easy to sell.

One advantage for investors: the bonds’ interest revenue id exempt from federal income tax and from state tax for in-state investors. So, an issue offering 6% is the equivalent of 10% to those individuals in the top tax bracket. Many investors feel very confident in buying the bonds, because it is inconceivable to them that there would ever e a default.

1) The University of Kentucky’s bonds are rated “AA-“ by Standard & Poor’s and A1 by Moody’s Investor Service. Why is it important to the University of Kentucky that its bonds have a high bond rating?

Answer 1

Credit rating agencies give rating to those funds or firms based on many aspects like:

• repayment abilities
• good standards according to regulations
• meeting the financial obligations and so on

hence, the firm or Bond or Fund, which carries higher rating in the market, carries higher reputation as well as trust from the investors. Hence, the University of Kentucky is carrying high bond rating, it is good to them to attract more and more investors into their bonds. That also helpful to the investors to make they payments into safe hands and can get good returns.