2010 A-133 Report - Finance - University of Michigan

THE UNIVERSITY OF MICHIGAN
Management's Discussion and Analysis (Unaudited)--Continued
The University continues to increase its mix of fixed rate bonds relative to variable rate demand
bonds. While fixed rate bonds typically have a higher effective rate of interest as compared to
variable rate demand bonds, they are subject to less volatility from liquidity and interest rate
perspectives. The University’s fixed and variable rate debt as of June 30, 2010 and 2009 is
summarized as follows:
2010 2009
(in millions)
Variable rate:
Commercial paper $ 87 $ 102
Demand bonds 760 1,075
Fixed rate bonds 657 310
$ 1,504 $ 1,487
The University’s variable rate bonds are subject to remarketing and, in accordance with GASB
Interpretation No. 1, are classified as current liabilities unless supported by long-term liquidity
arrangements, such as lines of credit or standby bond purchase agreements, which could
refinance the debt on a long-term basis. In the event that debt is put back to the University by
the debt holder, management believes that it will be remarketed within a reasonable amount of
time. The University’s strong credit rating facilitates the remarketing of its debt. In addition,
the University maintains three remarketing agents to achieve a wide distribution of its variable
rate debt.
Interest expense net of federal subsidies received for interest on taxable Build America Bonds
and interest capitalized during construction increased 6 percent, to $27 million in 2010.
The University maintains a combination of variable and fixed rate debt, with effective interest
rates that averaged approximately 2 percent in 2010 and 2009, including the amortization of
bond premiums and discounts and net of federal subsidies for interest on taxable Build America
Bonds.
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