Since late 2006, fund executives have been fretting over a past accounting treatment and reinterpretation of an accounting standard for municipal bond funds.
At issue is the accounting treatment for a widely used complex derivative security known as an "inverse floater." Inverse floaters are fixed-income securities that are structured through the selling of a fixed-rate municipal bond to a specially created financial vehicle known as a tender option bond trust. The trust then issues variable, or floating, rate notes to third parties. These notes are collateralized by the fixed-rate bonds, and the fund manager typically purchases an interest in the trust and its cash flows. The variable return on an inverse floater is tied to a specific floating-rate index and fluctuates.