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respect to bonds secured by a specific revenue stream. <br /> Debt Service Reserve Fund: Traditional bond issues are structured with a debt <br /> service reserve fund, which assures the timely availability of sufficient funds for <br /> the repayment of debt service in the event that an issuer cannot make the <br /> required debt service payment(s). Typically, the required size of the reserve fund <br /> is determined by the lesser of: 100% of maximum annual debt service; 125% of <br /> average annual debt service; or 10% of the aggregate issue price. Reserve funds <br /> are usually fully funded out of bond proceeds and are set-aside in a separate <br /> fund, as long as the debt service fund is fully funded, and can only be used to <br /> offset debt service payments. <br /> Defeasance: Termination of rights and interests of the bondholders and their lien <br /> on the pledged revenues or other security in accordance with the terms of the <br /> bond contract for an issue of bonds. Defeasance usually occurs in connection with <br /> the refunding of an outstanding issue after provision has been made for future <br /> payment of all obligations under the outstanding bonds through funds provided by <br /> the issuance of a new series of bonds. <br /> Derivative Product: A product, such as an option or futures contract,whose <br /> value is derived from the performance of an underlying security. Acommonly <br /> used derivative is an interest rate swap. Given the complexity of derivative <br /> products, the City of Pittsburg and its related entities will no longer utilize <br /> derivative products in its debt issuances. <br /> Discount Rate: The interest rate used for adjusting for the time value of money <br /> for net present value calculations, option pricing models, and other market <br /> models. The term "discount rate" can also refer to the rate that the Federal <br /> Reserve Bank charges its members for overnight deposits. <br /> Good Faith Deposit: A sum of money or, alternatively, a surety bond provided to <br /> an issuer of a new issue of municipal securities by an underwriter or underwriting <br /> syndicate as an assurance of performance on its offer to purchase the issue. <br /> Good faith deposits generally are required in connection with competitive sales <br /> and sometimes in connection with negotiated sales. <br /> Hedging: A strategy designed to reduce investment risk. A hedge can help <br /> reduce the risk and volatility of a portfolio. A common hedging strategy includes <br /> matching the amount of short-term assets with the amount of short- term variable <br /> rate debt outstanding. <br /> Letter of Credit: Two types of letter of credit are used in bond and other debt <br /> financings: standby letter of credit and direct pay letter of credit. They provide <br /> credit enhancement for debt issues by shifting the risk of repayment from the <br /> issuer to the bank issuing the letter of credit. Letters of credit are usually <br /> required for the issuance of variable rate debt. Letters of credit also are used to <br /> provide liquidity. <br /> A Standby Letter of Credit is an agreement issued by a commercial bank that <br /> City of Pleasanton Debt Management Policy (February 2022) Page 15 <br />