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<br />City of Hastings, Minnesota <br />September 26, 2005 <br /> <br />10. TelT1l Bonds <br /> <br />11. Federal Treasury Regulations Concerning Tax- <br />Exempt Obligations <br /> <br />(a) Bank Qualification <br /> <br />(b) Rebate Requirements <br /> <br />We have included a provision that permits the <br />underwriters to combine multiple maturity years into a <br />term bond, subject to mandatory redemption on the <br />same maturity schedule provided in the Terms of <br />Proposal. The advantage to the underwriter is that it <br />provides large blocks of bonds, which are more <br />attractive to bond funds, and certain pension funds. <br />This in turn is a benefit to the City since selling larger <br />blocks of bonds reduces the risk to the underwriter, <br />allowing them to lower their costs and the interest <br />coupons. Since the Bonds are being offered on a <br />competitive bid basis and awarded on the lowest true <br />interest cost, the City will award the Bonds to the best <br />bid regardless of whether term bonds are chosen or <br />not. <br /> <br />Under Federal Tax Law, financial institutions cannot <br />deduct from income for federal income tax purposes, <br />expense that is allocable to carrying and acquiring tax- <br />exempt bonds. There is an exemption to this for "bank <br />qualified" bonds, which can be so designated if the <br />issuer does not issue more than $10 million oftax <br />exempt bonds in a calendar year. Issues that are <br />bank qualified generally receive slightly lower interest <br />rates than issues that are not bank qualified. Since <br />the City expects to issue less than $10 million of tax <br />exempt obligations in 2005, the Bonds are designated <br />as bank qualified. <br /> <br />All tax-exempt issues are subject to the federal <br />arbitrage and rebate requirements, which require all <br />excess earnings created by the financing to be rebated <br />to the U.S. Treasury. The requirements generally <br />cover two categories: bond proceeds and debt service <br />funds. There are exemptions from rebate in both of <br />these categories. <br /> <br />The Series 2005A Bonds - The Project Portion of <br />Bond proceeds, defined generally as both the original <br />principal of the issue and the investment earnings on <br />the principal, have 6, 18 and 24 month spend down <br /> <br />Page 3 <br />