Bond Markets Analysis and Strategies 9th Edition Fabozzi Solutions Manual

Bond Markets Analysis and Strategies 9th Edition Fabozzi Solutions Manual
Bond Markets Analysis and Strategies 9th Edition Fabozzi Solutions Manual
Bond Markets Analysis and Strategies 9th Edition Fabozzi Solutions Manual

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CHAPTER 8

MUNICIPAL SECURITIES

CHAPTER SUMMARY

Municipal securities are issued by state and local governments and by entities that they
establish. All states issue municipal securities. Local governments include cities and counties.
Political subdivisions of municipalities that issue securities include school districts and special
districts for fire prevention, water, sewer, and other purposes. Municipalities issue long-term
bonds as the principal means for financing both (1) long-term capital projects such as the
construction of schools, bridges, roads, and airports; and (2) long-term budget deficits that
arise from current operations. The tax treatment of interest at the state and local level varies.
Historically, the investors in municipal bonds have included mutual funds, bank trust
departments, property and casualty insurance companies, and high net worth individuals.
Hedge funds, arbitrageurs, life insurance companies, and foreign banks have become important
participants. These investors are not interested in the tax-exempt feature. Instead, their primary
interest is in opportunities to benefit from leveraged strategies that seek to generate capital
gains.

TYPES AND FEATURES OF MUNICIPAL SECURITIES

There are basically two different types of municipal bond security structures: tax-backed bonds
and revenue bonds. There are also securities that share characteristics of both tax-backed and
revenue bonds.

Tax-Backed Debt

Tax-backed debt obligations are instruments issued by states, counties, special districts, cities,
towns, and school districts that are secured by some form of tax revenue. Tax-backed debt
includes general obligation debt, appropriation-backed obligations, and debt obligations
supported by public credit enhancement programs.

General Obligation Debt

The broadest type of tax-backed debt is general obligation debt. An unlimited tax general
obligation debt is the stronger form of general obligation pledge as it is secured by the
issuer’s unlimited taxing power. A limited tax general obligation debt is a limited tax
pledge because for such debt there is a statutory limit on tax rates that the issuer may levy to
service the debt.

Agencies or authorities of several states have issued bonds that carry a potential state liability
for making up shortfalls in the issuing entity’s obligation. However, the state’s pledge is not
binding. Debt obligations with this nonbinding pledge of tax revenue are called moral
obligation bonds.

6. Copyright © 2016 Pearson Education, Inc. 178
Revenue Bonds

The second basic type of security structure is found in a revenue bond. Such bonds are issued for
either project or enterprise financings in which the bond issuers pledge to the bondholders the
revenues generated by the operating projects financed. For a revenue bond, the revenue of the
enterprise is pledged to service the debt of the issue. The details of how revenue received by the
enterprise will be disbursed are set forth in the trust indenture.

There are various restrictive covenants included in the trust indenture for a revenue bond to
protect the bondholders. A rate, or user charge, covenant dictates how charges will be set on the
product or service sold by the enterprise. An additional bonds’ covenant indicates whether
additional bonds with the same lien may be issued. Other covenants specify that the facility may
not be sold, the amount of insurance to be maintained, requirements for recordkeeping and for
the auditing of the enterprise’s financial statements by an independent accounting firm, and
requirements for maintaining the facilities in good order.

Hybrid and Special Bond Securities

Some municipal bonds that have the basic characteristics of general obligation bonds and
revenue bonds have more issue-specific structures as well. Some examples are insured bonds,
bank-backed municipal bonds, refunded bonds structured/asset-backed securities and “troubled
city” bailout bonds.

Insured bonds, in addition to being secured by the issuer’s revenue, are also backed by
insurance policies written by commercial insurance companies. Because municipal bond
insurance reduces credit risk for the investor, the marketability of certain municipal bonds can be
greatly expanded.

Municipal obligations have been increasingly supported by various types of credit facilities
provided by commercial banks. There are three basic types of bank support: letter of credit,
irrevocable line of credit, and revolving line of credit. A letter-of-credit agreement is the
strongest type of support available from a commercial bank. Under this arrangement, the bank is
required to advance funds to the trustee if a default has occurred. An irrevocable line of credit
is not a guarantee of the bond issue, although it does provide a level of security. A revolving line
of credit is a liquidity-type credit facility that provides a source of liquidity for payment of
maturing debt in the event that no other funds of the issuer are currently available.

Although originally issued as either revenue or general obligation bonds, municipals are
sometimes refunded. A refunding usually occurs when the original bonds are escrowed or
collateralized by direct obligations guaranteed by the U.S. government. The escrow fund for a
refunded municipal bond can be structured so that the refunded bonds are to be called at the first
possible call date or a subsequent call date established in the original bond indenture. Such bonds
are known as prerefunded municipal bonds. Although refunded bonds are usually retired at
their first or subsequent call date, some are structured to match the debt obligation to the
retirement date. Such bonds are known as escrowed-to-maturity bonds.

There are three reasons why a municipal issuer may refund an issue by creating an escrow fund.

7. Copyright © 2016 Pearson Education, Inc. 179
First, many refunded issues were originally issued as revenue bonds. Second, some issues are
refunded in order to alter the maturity schedule of the obligation. Third, when interest rates have
declined after a municipal security has been issued, there is a tax arbitrage opportunity available
to the issuer by paying existing bondholders a lower interest rate and using the proceeds to create
a portfolio of U.S. government securities paying a higher interest rate.

MUNICIPAL MONEY MARKET PRODUCTS

Tax-exempt money market products include notes, commercial paper, variable-rate demand
obligations, and a hybrid of the last two products.

Municipal notes include tax anticipation notes (TANs), revenue anticipation notes (RANs),
grant anticipation notes (GANs), and bond anticipation notes (BANs). These are temporary
borrowings by states, local governments, and special jurisdictions. Usually, notes are issued for
a period of 12 months, although it is not uncommon for notes to be issued for periods as short as
three months and for as long as three years. TANs and RANs (also known as TRANs) are issued
in anticipation of the collection of taxes or other expected revenues. These are borrowings to
even out irregular flows into the treasuries of the issuing entity. BANs are issued in anticipation
of the sale of long-term bonds.

Variable-rate demand obligations (VRDOs) are floating-rate obligations that have a nominal
long-term maturity but have a coupon rate that is reset either daily or every seven days. The
investor has an option to put the issue back to the trustee at any time with seven days’ notice.
The put price is par plus accrued interest.

Floaters / Inverse Floaters

A common type of derivative security in the municipal bond market is one in which two classes
of securities, a floating-rate security and an inverse-floating-rate bond, are created from
a fixed-rate bond. The coupon rate on the floating-rate security is reset based on the results of a
Dutch auction.

Inverse floaters can be created in one of three ways. First, a municipal dealer can buy in the
secondary market a fixed-rate municipal bond and place it in a trust. The trust then issues
a floater and an inverse floater. The second method is similar to the first except that the
municipal dealer uses a newly issued municipal bond to create a floater and an inverse floater.
The third method is to create an inverse floater without the need to create a floater. This is done
using the municipal swaps market. The third method is to create an inverse floater without the
need to create a floater. The structure used to create the inverse floater is called a tender option
bond structure.

CREDIT RISK

Municipal bonds are viewed as having little credit risk. Default rate data for municipal bonds, as
reported by Moody’s, indicate that default rates are historically far less than that for corporate
default bond rates with the same initial credit rating.

8. Copyright © 2016 Pearson Education, Inc. 180

Defaults do not necessary result in a bankruptcy filing. For a corporate bond the two relevant
chapters of the bankruptcy law are Chapter 7 and Chapter 11. For municipalities the relevant
provision to obtain bankruptcy protection is Chapter 9, which provides for reorganization, very
much similar to a Chapter 11 corporate bankruptcy in that sense. As with corporate bonds, some
institutional investors in the municipal bond market rely on their own in-house municipal credit
analysts for determining the credit worthiness of a municipal issue; other investors rely on the
nationally recognized rating companies.

In evaluating general obligation bonds, the commercial rating companies assess information in
four basic categories. The first category includes information on the issuer’s debt structure to
determine the overall debt burden. The second category relates to the issuer’s ability and political
discipline to maintain sound budgetary policy. The third category largely involves determining
the specific local taxes and intergovernmental revenues available to the issuer. The fourth and
last category of information necessary to the credit analysis is an assessment of the issuer’s
overall socioeconomic environment.

RISKS ASSOCIATED WITH INVESTING IN MUNICIPAL SECURITIES

The investor in municipal securities is exposed to the same risks affecting corporate bonds plus
an additional one that may be labeled tax risk. There are two types of tax risk to which
tax-exempt municipal securities buyers are exposed. The first is the risk that the federal income
tax rate will be reduced. The second type of tax risk is that a municipal bond issued as a
tax-exempt issue may eventually be declared to be taxable by the Internal Revenue Service.

YIELDS ON MUNICIPAL BONDS

A common yield measure used to compare the yield on a tax-exempt municipal bond with a
comparable taxable bond is the equivalent taxable yield. The equivalent taxable yield is
computed as follows:

equivalent taxable yield = tax-exempt
(1 marginal tax rate)− .

Yield Spreads

Because of the tax-exempt feature of municipal bonds, the yield on municipal bonds is less than
that on Treasuries with the same maturity. The yield on municipal bonds is compared to the yield
on Treasury bonds with the same maturity by computing the following ratio:

yield ratio = yield on municipal bond
yield on same maturity Treasury bond .

Yield spreads within the municipal bond market are attributable to differences between credit
ratings (i.e., quality spreads), sectors within markets (intramarket spreads), and differences
between maturities (maturity spreads).

9. Copyright © 2016 Pearson Education, Inc. 181

MUNICIPAL BOND MARKET

Primary Market

Substantial numbers of municipal obligations are brought to market each week. A state or local
government can market its new issue by offering bonds publicly to the investing community or
by placing them privately with a small group of investors. When a public offering is selected, the
issue usually is underwritten by investment bankers and/or municipal bond departments of
commercial banks. Most states mandate that general obligation issues be marketed through
competitive bidding, but generally this is not required for revenue bonds.
An official statement describing the issue and the issuer is prepared for new offerings.
Municipal bonds have legal opinions that are summarized in the official statement.

Secondary Market

Municipal bonds are traded in the over-the-counter market supported by municipal bond dealers
across the country. Markets are maintained on smaller issuers (referred to as local general
credits) by regional brokerage firms, local banks, and by some of the larger Wall Street firms.
Larger issuers (referred to as general names) are supported by the larger brokerage firms and
banks, many of whom have investment banking relationships with these issuers.

The convention for both corporate and Treasury bonds is to quote prices as a percentage of par
value with 100 equal to par. Municipal bonds, however, generally are traded and quoted in terms
of yield (yield to maturity or yield to call). The price of the bond in this case is called a basis
price. The exception is certain long-maturity revenue bonds. A bond traded and quoted in dollar
prices (actually, as a percentage of par value) is called a dollar bond.

There are municipal bond indexes for gauging portfolio performance and the market’s
performance. These indexes are primarily used by portfolio managers of regulated investment
companies (mutual funds and closed-end funds) for performance evaluation purposes as well as
the benchmark for exchange-traded funds.

The municipal bond indexes most commonly used by institutional investors are those produced
Barclays (which it inherited from its acquisition of Lehman Brothers). The broad-based index is
the Barclays Capital National Municipal Bond Index. This index covers long-term tax-exempt
bonds that are investment grade. Barclays also publishes a High-Yield Municipal Index and
enhanced state-specific indexes.

THE TAXABLE MUNICIPAL BOND MARKET

Taxable municipal bonds are bonds whose interest is taxed at the federal income tax level.
Because there is no tax advantage, an issuer must offer a higher yield than for another
tax-exempt municipal bond.

The most common types of activities for taxable municipal bonds used for financing are (i) local

10. Copyright © 2016 Pearson Education, Inc. 182
sports facilities, (ii) investor-led housing projects, (iii) advanced refunding of issues that are not
permitted to be refunded because the tax law prohibits such activity, and (iv) underfunded
pension plan obligations of the municipality.

Despite the excellent performance of the municipal bond sector in terms of credit risk, in 2008 state
and local governments and their agencies faced financial difficulties. To provide assistance to these
municipal entities, the American Recovery and Investment Act of 2009 authorized the issuance of a
new type of taxable municipal bond, Build America Bonds (dubbed BABs). A BAB is a taxable
municipal bond wherein the issuer is subsidized for the higher cost of issuing a taxable bond rather
than a tax-exempt bond in the form of a payment from the U.S. Department of the Treasury.

KEY POINTS

• Municipal securities are issued by state and local governments and their authorities, with the
interest on most issues exempt from federal income taxes. Tax-exempt and taxable municipal
securities are available. “Tax exempt” means that interest on a municipal security is exempt
from federal income taxation.
• The two basic types of municipal security structures are tax-backed debt and revenue
bonds.
• Tax-backed debt obligations are instruments issued by states, counties, special districts, cities,
towns, and school districts that are secured by some form of tax revenue. Tax-backed debt
includes general obligation debt (the broadest type of tax-backed debt), appropriation-backed
obligations, and debt obligations supported by public credit enhancement programs.
• A general obligation bond is said to be double-barreled when it is secured not only by the
issuer’s general taxing powers to create revenues accumulated in a general fund but also by
certain identified fees, grants, and special charges, which provide additional revenues from
outside the general fund.
• Revenue bonds are issued for enterprise financings secured by the revenues generated by the
completed projects themselves or for general public-purpose financings in which the issuers
pledge to the bondholders the tax and revenue resources that were previously part of the
general fund.
• Credit-enhanced municipal bonds include insured bonds and letter-of-credit–backed municipal
bonds. Insured bonds, in addition to being secured by the issuer’s revenue, are backed by an
insurance policy written by commercial insurance companies; letter-of-credit–backed municipal
bonds are supported by various types of credit facilities provided by commercial banks.
Because of the difficulties faced by monoline insurers, the number of such insured municipal
bonds issued today is minimal.
• Prerefunded bonds are no longer secured as either general obligation or revenue bonds when
originally issued but are supported by a portfolio of securities held in an escrow fund. If
escrowed with securities guaranteed by the U.S. government, refunded bonds are the safest
municipal bonds available. A prerefunded municipal bond is one in which the escrow fund is
structured so that the bonds are to be called at the first possible call date or a subsequent call
date established in the original bond indenture.

11. Copyright © 2016 Pearson Education, Inc. 183
• Municipal securities structured as asset-backed securities are backed by “dedicated” revenues
such as sales taxes and tobacco settlement payments.
• Municipal notes and variable-rate demand obligations are tax-exempt money market products
issued by municipalities.
• Investing in municipal securities exposes investors to credit risk and tax risk. Because of the
low historical default rates for municipal bonds, until recently credit risk has been viewed as
small. Rating agencies evaluate the credit risk associated with municipal securities just as they
do for corporate bonds.
• Municipal bond default rates have been less than corporate bond defaults rates with the same
credit rating at issuance.
• For municipalities seeking protection under the bankruptcy law, Chapter 13 is the relevant
filing.
• A Chapter 13 filing by a municipality allows for an adjustment of the municipality’s debts.
• A tax risk associated with investing in municipal bonds is that the highest marginal tax rate
will be reduced, resulting in a decline in the value of municipal bonds. Another tax risk
associated with investing in municipal bonds is that a tax-exempt issue may be eventually
declared by the Internal Revenue Service to be taxable.
• Because of the tax-exempt feature, yields on municipal securities are lower than those on
comparably rated taxable securities. Within the municipal bond market, there are credit
spreads and maturity spreads. Typically, the municipal yield curve is upward sloping.
Moreover, there are yield spreads related to differences between in-state issues and general
market issues.
• Although the municipal bond market is dominated by tax-exempt municipal bonds, there are
taxable municipal bonds. Most recently, the issuance of Build America Bonds has
dramatically increased the municipal taxable bond market. Bonds issued under this federal
subsidized program have ceased because the program was terminated at the end of 2010.

12. Copyright © 2016 Pearson Education, Inc. 184
ANSWERS TO QUESTIONS FOR CHAPTER 8

(Questions are in bold print followed by answers.)

1. Answer the below questions.

(a) Explain why you agree or disagree with the following statement: “All municipal bonds
are exempt from federal income taxes.”

One would disagree with the statement: “All municipal bonds are exempt from federal income
taxes.” The argument and clarification are given below.

Municipal securities are issued by state and local governments and by governmental entities such
as “authorities” or special districts. There are both tax-exempt and taxable municipal bonds.
“Tax-exempt” means that interest on municipal bonds is exempt from federal income taxation,
and it may or may not be taxable at the state and local levels. Most municipal bonds outstanding
are tax-exempt.

Taxable municipal bonds are bonds whose interest is taxed at the federal income tax level.
Because there is no tax advantage, an issuer must offer a higher yield than for another
tax-exempt municipal bond. The yield must be higher than the yield on U.S. government bonds
because an investor faces credit risk by investing in a taxable municipal bond. The investors in
taxable municipal bonds are investors who view them as alternatives to corporate bonds.

(b) Explain why you agree or disagree with the following statement: “All municipal bonds
are exempt from state and local taxes.”

One would disagree with the statement that all municipal bonds are exempt from state and local
taxes. “Tax-exempt” means that interest on municipal bonds is exempt from federal income
taxation, and it may or may not be taxable at the state and local levels. Thus, not all municipal
bonds are exempt from state and local taxes.

2. If Congress changes the tax law so as to increase marginal tax rates, what will happen to
the price of municipal bonds?

An increase in the maximum marginal tax rate for individuals will increase the attractiveness of
municipal securities. This was seen with the Tax Act of 1990, which raised the maximum
marginal tax rate to 33%. Ceteris paribus, an increase in tax rates has a positive effect on the
price of municipal securities, as demand will increase. An increase in price is needed to restore
the desired returns.

On the other hand, a decrease in the maximum marginal tax rate for individuals will decrease the
attractiveness of municipal securities. This was seen with the Tax Reform Act of 1986 where the
maximum marginal tax rate for individuals was reduced from 50% to 28%. Ceteris paribus, a
decrease in tax rates has a negative effect on the price of municipal bonds, as demand will
decrease. The effect of a lower tax rate was once again seen in 1995 with Congressional

13. Copyright © 2016 Pearson Education, Inc. 185
proposals regarding the introduction of a flat tax when tax-exempt municipal bonds began
trading at lower prices. The higher the marginal tax rate, the greater the value of the tax
exemption features. As the marginal tax rate declines, the price of a tax-exempt municipal
security also declines.

3. What is the difference between a tax-backed bond and a revenue bond?

The two basic security structures are tax-backed debt and revenue bonds. The former are secured
by the issuer’s generally taxing power. Revenue bonds are used to finance specific projects and
are dependent on revenues from those projects to satisfy the obligations. Thus, the difference
between tax-backed bonds and revenue bonds involve how the bonds are secured. More details
are supplied below.

There are basically two different types of municipal bond security structures: tax-backed bonds
and revenue bonds. Tax-backed debt obligations are instruments issued by states, counties,
special districts, cities, towns, and school districts that are secured by some form of tax revenue.
Tax-backed debt includes general obligation debt, appropriation-backed obligations, and debt
obligations supported by public credit enhancement programs.

The broadest type of tax-backed debt is general obligation debt. There are two types of general
obligation pledges: unlimited and limited. An unlimited tax general obligation debt is the
stronger form of general obligation pledge because it is secured by the issuer’s unlimited taxing
power. The tax revenue sources include corporate and individual income taxes, sales taxes, and
property taxes. Unlimited tax general obligation debt is said to be secured by the full faith and
credit of the issuer.

The second basic type of security structure is found in a revenue bond. Such bonds are issued for
either project or enterprise financings in which the bond issuers pledge to the bondholders the
revenues generated by the operating projects financed. For a revenue bond, the revenue of the
enterprise is pledged to service the debt of the issue. There are various restrictive covenants
included in the trust indenture for a revenue bond to protect the bondholders. A rate, or user
charge, covenant dictates how charges will be set on the product or service sold by the enterprise.

4. Which type of municipal bond would an investor analyze using an approach similar to
that for analyzing a corporate bond?

Investors use a similar approach to analyze both municipal bonds and corporate bonds. As with
corporate bonds, some institutional investors in the municipal bond market rely on their own in-
house municipal credit analysts for determining the credit worthiness of a municipal issue; other
investors rely on the nationally recognized rating companies. The two leading rating companies
are Moody’s and Standard & Poor’s, and the assigned rating system is essentially the same as
that used for corporate bonds. More details on the actual procedure are given below.

In evaluating general obligation bonds, the commercial rating companies assess information in
four basic categories. The first category includes information on the issuer’s debt structure to
determine the overall debt burden. The second category relates to the issuer’s ability and political

14. Copyright © 2016 Pearson Education, Inc. 186
discipline to maintain sound budgetary policy. The focus of attention here usually is on the
issuer’s general operating funds and whether it has maintained at least balanced budgets over
three to five years. The third category involves determining the specific local taxes and
intergovernmental revenues available to the issuer as well as obtaining historical information
both on tax collection rates, which are important when looking at property tax levies, and on the
dependence of local budgets on specific revenue sources. The fourth and last category of
information necessary to the credit analysis is an assessment of the issuer’s overall
socioeconomic environment. The determinations that have to be made here include trends of
local employment distribution and composition, population growth, real estate property
valuation, and personal income, among other economic factors.

5. In a revenue bond, which fund has priority when funds are disbursed from the reserve
fund, the operation and maintenance fund or the debt service reserve fund?

For a revenue bond, the revenue of the enterprise is pledged to service the debt of the issue. The
details of how revenue received by the enterprise will be disbursed are set forth in the trust
indenture. Typically, the flow of funds for a revenue bond is as follows. First, all revenues from
the enterprise are put into a revenue fund. It is from the revenue fund that disbursements for
expenses are made to the following funds with priority given to those listed first: operation and
maintenance fund, sinking fund, debt service reserve fund, renewal and replacement fund,
reserve maintenance fund, and surplus fund. Thus, the operation and maintenance fund has
priority over the debt service reserve fund. More details are supplied below.

Operations of the enterprise have priority over the servicing of the issue’s debt, and cash needed
to operate the enterprise is deposited from the revenue fund into the operation and maintenance
fund. The pledge of revenue to the bondholders is a net revenue pledge; net meaning after
operation expenses, so cash required servicing the debt is deposited next in the sinking fund.
Disbursements are then made to bondholders as specified in the trust indenture. Any remaining
cash is then distributed to the reserve funds. The purpose of the debt service reserve fund is to
accumulate cash to cover any shortfall of future revenue to service the issue’s debt. The specific
amount that must be deposited is stated in the trust indenture. The function of the renewal and
replacement fund is to accumulate cash for regularly scheduled major repairs and equipment
replacement. The function of the reserve maintenance fund is to accumulate cash for
extraordinary maintenance or replacement costs that might arise. Finally, if any cash remains
after disbursement for operations, debt servicing, and reserves, it is deposited in the surplus fund.
The issuer can use the cash in this fund in any way it deems appropriate.

6. “An insured municipal bond is safer than an uninsured municipal bond.” Indicate whether
you agree or disagree with this statement.

Everything else being equal, an insured municipal bond is safer. However, generally speaking,
municipal bonds that are insured are riskier than those not insured especially if they are of
inferior quality. Thus, the insurance does not guarantee they are safer than an uninsured
municipal bond. More details are supplied below.

Insured bonds, in addition to being secured by the issuer’s revenue, are also backed by insurance

15. Copyright © 2016 Pearson Education, Inc. 187
policies written by commercial insurance companies. Insurance on a municipal bond is an
agreement by an insurance company to pay the bondholder any bond principal and/or coupon
interest that is due on a stated maturity date but that has not been paid by the bond issuer. When
issued, this municipal bond insurance usually extends for the term of the bond issue, and it
cannot be canceled by the insurance company.

Because municipal bond insurance reduces credit risk for the investor, the marketability of
certain municipal bonds can be greatly expanded. Municipal bonds that benefit most from the
insurance would include lower-quality bonds, bonds issued by smaller governmental units not
widely known in the financial community, bonds that have a sound though complex and
difficult-to-understand security structure, and bonds issued by infrequent local-government
borrowers who do not have a general market following among investors.

7. Who are the parties to a letter-of-credit–backed municipal bond, and what are their
responsibilities?

A letter-of-credit (LOC) agreement is the strongest type of support available from a
commercial bank. There are three parties to an LOC: LOC provider, municipal issuer, and bond
trustee. The duties of these three parties are discussed below.

The LOC provider `is the bank that issues the LOC and is required to advance funds to the
trustee if one of any specified events occurs. The municipal issuer is the municipality that is
requesting the LOC in connection with the offering of the bond. The municipal issuer agrees to
two things: (1) to reimburse the LOC provider for any payments that the LOC provider had to
make under the agreement, and (2) to make an LOC fee payment periodically to the LOC
provider. The LOC fee is typically from 50 basis points to 200 basis points of the outstanding
principal amount of the bond issue.

A direct-pay LOC grants the trustee the right to request that the LOC provider provide principal
and/or interest for the LOC-backed municipal bond if there is a specified event or default or an
inability of the municipal issuer to meet a contractual interest payment or principal at the
maturity date. The trustee can make this demand for funds on the LOC provider without
requesting that the municipal issuer make the payment first. In contrast to a direct-pay LOC, the
other two types of LOC arrangements (standby LOC and confirming LOC) require that the
trustee must first request any contractual payment from the municipal issuer before drawing
down on the LOC.

8. Answer the below questions.

(a) What are the three different types of letter-of-credit in a municipal bond, and how do
they differ?

There are three types of letter-of-credit (LOC) arrangements: (1) direct-pay LOC, (2) standby
LOC, and (3) confirming LOC. Below we describe these types and their differences.

16. Copyright © 2016 Pearson Education, Inc. 188
A direct-pay LOC grants the trustee the right to request that the LOC provider provide principal
and/or interest for the LOC-backed municipal bond if there is a specified event or default or an
inability of the municipal issuer to meet a contractual interest payment or principal at the
maturity date. The trustee can make this demand for funds on the LOC provider without
requesting that the municipal issuer make the payment first. From a credit perspective, the
direct-pay LOC provides the trustee and therefore the bondholders with the most comfort. This is
because in contrast to a direct-pay LOC, the other two types of LOC arrangements (standby LOC
and confirming LOC) require that the trustee must first request any contractual payment from the
municipal issuer before drawing down on the LOC.

The distinction between a standby LOC and a confirming LOC (also called a LOC wrap) is
that there are small community banks that are unrated by any of the rating agencies but
nevertheless can issue an LOC. As a result, these small banks look to a correspondent bank that
is a larger rated bank to confirm their LOC. If the correspondent bank fails to honor its LOC, the
smaller bank must do so. That is, the LOC provider is the small bank but the underlying credit is
the larger bank. In fact, a confirming LOC can also be provided so that an entity other than a
bank can be an LOC provider.

(b) Which of letter-of-credit bond provides the greatest protection for investors?

From a credit perspective, the direct-pay LOC provides the trustee and therefore the bondholders
with the greatest protection compared to either the standby LOC or the confirming LOC. This is
because the latter two types of LOC arrangements (in contrast to direct-pay LOC) require that
the trustee must first request any contractual payment from the municipal issuer before drawing
down on the LOC.

9. Answer the below questions.

(a) What is a prerefunded bond?

The escrow fund for a refunded municipal bond can be structured so that the refunded bonds are
to be called at the first possible call date or a subsequent call date established in the original bond
indenture. Such bonds are known as prerefunded municipal bonds.

(b) Why does a properly structured prerefunded municipal bond have no credit risk?

When this portfolio of securities whose cash flow matches that of the municipality’s obligation is
in place, the refunded bonds are no longer secured as either general obligation or revenue bonds.
The bonds are now supported by the portfolio of securities held in an escrow fund. Such bonds,
if escrowed with securities guaranteed by the U.S. government, have little if any credit risk. They
are the safest municipal bond investments available.

10. Give two reasons why an issuing municipality would want to refund an outstanding
bond issue.

There are three reasons why a municipal issuer may refund an issue by creating an escrow fund.
First, many refunded issues were originally issued as revenue bonds. Included in revenue issues

17. Copyright © 2016 Pearson Education, Inc. 189
are restrictive-bond covenants. The municipality may wish to eliminate these restrictions. The
creation of an escrow fund to pay the bondholders legally eliminates any restrictive-bond
covenants. This is the motivation for the escrowed-to-maturity bonds. Second, some issues are
refunded in order to alter the maturity schedule of the obligation. Third, when interest rates have
declined after a municipal security has been issued, there is a tax arbitrage opportunity available
to the issuer by paying existing bondholders a lower interest rate and using the proceeds to create
a portfolio of U.S. government securities paying a higher interest rate. This is the motivation for
the prerefunded bonds.

11. The following statement appeared in a publication by the Idaho State Treasurer’s
Office:
“Each year since 1982 the Idaho State Treasurer has issued a State of Idaho Tax Anticipation
Note ‘TAN’. These notes are municipal securities that are one-year, interest-bearing debt
obligations of the State of Idaho. The distinguishing characteristic of a municipal security is
that the interest earned on them is exempt from federal income tax. Idaho municipal securities
are further exempt from state income taxes. Idaho’s TANs are issued in multiples of $5,000
which is the amount paid when the bond matures. Idaho TANs are issued with a fixed interest
rate.”

Why is a TAN issued by a municipality?

A TAN is a tax anticipation note that is a short-term obligation issued by a state or municipal
government in anticipation of future tax collections. Because municipalities need to cover
seasonal and temporary imbalances and also need immediate funding for a project (such as
a highway construction), a TAN is an ideal means of raising the money now and paying off the
expenditures at a later date through taxes that will be collected.

12. What are the revenues supporting an asset-backed security issued by a municipality?

Municipal securities structured as asset-backed securities are backed by “dedicated” revenues
such as sales taxes and tobacco settlement payments. Municipal notes are issued for shorter
periods (1–3 years) than municipal bonds.

13. The four largest tobacco companies in the United States reached a settlement with 46
state attorneys general to pay a total of $206 billion over the following 25 years. Answer the
below questions.

(a) States and municipalities, New York City being the first, sold bonds backed by the
future payments of the tobacco companies. What are these bonds called?

In recent years, state and local governments began issuing bonds where the debt service is to be
paid from so-called dedicated revenues such as sales taxes, tobacco settlement payments, fees,
and penalty payments. Asset-backed bonds are also referred to as dedication revenue bonds and
structured bonds. These bonds have unique risks compared to other types of revenue bonds.
Below we describe examples of these bonds.

18. Copyright © 2016 Pearson Education, Inc. 190
One example is the bonds backed by tobacco settlement payments. In 1998, the four largest
tobacco companies (Philip Morris, R. J. Reynolds, Brown & Williamson, and Lorillard) reached
a settlement with 46 state attorneys general to pay over the following 25 years a total of $206
billion. States and municipalities began to sell bonds backed by the future payments of the
tobacco companies, commonly referred to as Tobacco Settlement Bonds. New York City was
the first to do so in November 1999 with a bond offering of $709 million.

The second example is the New Jersey Economic Development Authority series of cigarette tax
revenue bonds issued in 2004. A concern that arose here after the bonds were issued was that the
New Jersey 2007 state budget increased the cigarette tax but, at the same time, increased the
amount of the cigarette tax revenue that had to be distributed into the State’s health care subsidy
fund. Hence, there was concern that there would not be a sufficient amount after the allocation to
that fund to pay the bondholders.

(b) What is the credit risk associated with these bonds?

The credit risk (associated with the dedication revenue bonds just described) is that they depend
on the ability of the tobacco companies to make the payments or the concern that the state would
sufficiently allocate cigarette tax revenue.

14. Answer the below questions.

(a) Explain how an inverse-floating-rate municipal bond can be created.

A common type of derivative security in the municipal bond market is one in which two classes of
securities, a floating-rate security and an inverse-floating-rate bond, are created from a fixed-rate
bond. The sum of the interest paid on the floater and inverse floater (plus fees associated with the
auction) must always equal the sum of the fixed-rate bond from which they were created.

Inverse floaters can be created in one of three ways. First, a municipal dealer can buy in the
secondary market a fixed-rate municipal bond and place it in a trust. The trust then issues
a floater and an inverse floater. The second method is similar to the first except that the
municipal dealer uses a newly issued municipal bond to create a floater and an inverse floater.
The third method is to create an inverse floater without the need to create a floater. This is done
using the municipal swaps.

(b) Who determines the leverage of an inverse floater?

The dealer determines the leverage of an inverse floater by choosing the ratio of floaters to
inverse floaters. For example, an investment banking firm may purchase $100 million of the
underlying bond in the secondary market and issue $50 million of floaters and $50 million of
inverse floaters. The dealer may opt for a 60/40 or any other split. The split of floaters/inverse
floaters determines the leverage of the inverse floaters and thus affects its price volatility when
interest rates change.

(c) What is the duration of an inverse floater?

19. Copyright © 2016 Pearson Education, Inc. 191

The duration of an inverse floater is a multiple of the underlying fixed-rate issue from which it
was created. The multiple is determined by the leverage. To date, the most popular split of
floaters and inverse floaters has been 50/50. In such instances, the inverse floater will have
double the duration of the fixed-rate bond from which it is created. Determination of the leverage
will be set based on the desires of investors at the time of the transaction.

15. Historically, what have been the causes of municipal bankruptcies?

Municipal bonds are viewed as having little default risk. Moreover, cumulative default rates and
recovery rates for investment-grade municipal bonds are better than for comparably rated
corporate bonds. For example, according to Moody’s, over the period of 1970 to 2005, the
10-year cumulative default rate was 2.23% for corporate bonds compared to 0.06% for
comparably rated municipal bonds. Moreover, Moody’s also reports that the average recovery
rate was only 42% of par for corporate bonds that defaulted compared to 66% for defaulted
municipal bonds.

Spiotto provides a history of municipal bond defaults as well as the causes and nature of defaults.
These include:

Economic conditions: Defaults caused by downturns in the economy and high interest rates.
Nonessential services: Revenue bonds issued for services whose service was no longer needed.
Feasibility of projects and industries: Revenue bonds are issued after a feasibility study for
a project is completed. The feasibility study may have been too optimistic with respect to the
demand for the project or the cost of completing the project.
Fraud: Municipal officials fail to comply with the terms of the relevant documents.
Mismanagement: Inability to successfully manage a project.
Unwillingness to pay: A municipality may simply be unwilling to pay (i.e., repudiation of the
debt obligation).
Natural disasters: The impairment of a municipality’s budget (reduction in revenue and
increase in costs) may be the result of a natural disaster such as a hurricane.

16. Credit default swaps, a derivative instrument described in Chapter 30, allow investors
to buy and sell protection against the default of a municipal issuer. Why do you think it is
difficult to find investors who are willing to buy protection against default of a municipal
issuer but a large number of investors are willing to sell such protection?

Municipal bonds are viewed as having little default risk thus indicating no need to buy default
protection. For example, according to Moody’s, over the period of 1970 to 2005, the 10-year
cumulative default rate was 2.23% for corporate bonds compared to 0.06% for comparably rated
municipal bonds. Moreover, Moody’s also reports that the average recovery rate was only 42%
of par for corporate bonds that defaulted compared to 66% for defaulted municipal bonds. In
conclusion, because the default rate is very low and the recovery rate is relatively high, many
more would want to sell protection on a low risk municipal issuer as opposed to buying
protection.

20. Copyright © 2016 Pearson Education, Inc. 192
17. Answer the below questions.

(a) Why doesn’t a Chapter 13 bankruptcy filing by a municipality allow for its liquidation?

Chapter 13 bankruptcy filing by a municipality does not allow for its liquidation because its goal
is to allow a municipality to seek protection under the bankruptcy law by adjusting its debts. A
Chapter 13 debtor typically is permitted to maintain property, whether it is exempt or not, as long
as the Chapter 13 plan complies with the law. In contrast to Chapter 7, Chapter 13 may involve
more expense in terms of attorney's fees, as the process is more complicated and drawn out.
Furthermore, unlike Chapter 7 that lasts only several months, Chapter 13 bankruptcy will last
from 3 to 5 years. This lengthy time period is due to the fact that Chapter 13 involves regular
monthly payments to the Chapter 13 trustee for the plan period.

(b) What is the role of the bankruptcy court in a Chapter 13 bankruptcy case?

The role of the bankruptcy court in a Chapter 13 bankruptcy case is to make sure that there is
plan of action that will meet minimum standards. For example, the court must make sure that the
debtor is trustworthy and not attempting to misrepresent his finances thereby perpetrating a fraud
on the court. The court must also pass judgment on whether the Chapter 13 plan takes into
consideration the best interest of the creditors. This requires that the plan must pay unsecured
creditors at least what they would have had under a Chapter 7 bankruptcy. In particular, the
bankruptcy court must make sure that the plan pays unsecured creditors a certain amount
multiplied by the debtor's disposable income.

18. In a revenue bond, what is a catastrophe call provision?

In revenue bonds there is a catastrophe call provision that requires the issuer to call the entire
issue if the facility is destroyed. More information on the retirement structure of municipal bonds
including call provisions is given below.

Municipal bonds are issued with one of two debt retirement structures, or a combination. Either
a bond has a serial maturity structure or it has a term maturity structure. A serial maturity
structure requires a portion of the debt obligation to be retired each year. A term maturity
structure provides for the debt obligation to be repaid on a final date. Usually, term bonds have
maturities ranging from 20 to 40 years and retirement schedules (sinking fund provisions) that
begin 5 to 10 years before the final term maturity. Municipal bonds may be called prior to the
stated maturity date, either according to a mandatory sinking fund or at the option of the issuer.
In revenue bonds there is a catastrophe call provision that requires the issuer to call the entire
issue if the facility is destroyed.

19. What is the tax risk associated with investing in a municipal bond?

The investor in municipal securities is exposed to the same risks affecting corporate bonds plus
an additional one that may be labeled tax risk. There are two types of tax risk to which
tax-exempt municipal securities buyers are exposed.

21. Copyright © 2016 Pearson Education, Inc. 193
The first is the risk that the federal income tax rate will be reduced. The higher the marginal tax
rate, then the greater the value of the tax exemption feature. As the marginal tax rate declines, the
price of a tax-exempt municipal security will decline.

The second type of tax risk is that a municipal bond issued as a tax-exempt issue may eventually
be declared to be taxable by the Internal Revenue Service. This may occur because many
municipal revenue bonds have elaborate security structures that could be subject to future
adverse congressional action and IRS interpretation. A loss of the tax exemption feature will
cause the municipal bond to decline in value in order to provide a yield comparable to similar
taxable bonds.

20. Answer the below questions.

(a) What is the equivalent taxable yield for an investor facing a 40% marginal tax rate, and
who can purchase a tax-exempt municipal bond with a yield of 7.2?

A common yield measure used to compare the yield on a tax-exempt municipal bond with
a comparable taxable bond is the equivalent taxable yield. The equivalent taxable yield is
computed as follows:

equivalent taxable yield = )rate tax marginal1(
exempt-tax
− .

In our problem, we assume that an investor in the 40% marginal tax bracket is considering the
acquisition of a tax-exempt municipal bond that offers a yield of 7.2%. Inserting our values into
our equation gives:

equivalent taxable yield = )40.01(
0.072
− = 0.1200 = 12.00%.

(b) What are the limitations of using the equivalent taxable yield as a measure of relative
value of a tax-exempt bond versus a taxable bond?

When computing the equivalent taxable yield, the traditionally computed yield to maturity is not
the tax-exempt yield if the issue is selling at a discount because only the coupon interest is
exempt from federal income taxes. Instead, the yield to maturity after an assumed tax rate on the
capital gain is computed and used in the numerator of the formula that computes the equivalent
taxable yield. Also, as described below, one must realize that the effects of other taxes can also
pose problems when comparing tax-exempt bonds versus taxable bonds.

Because of the tax-exempt feature of municipal bonds, the yield on municipal bonds is less than
that on Treasuries with the same maturity. Bonds of municipal issuers located in certain states
yield considerably less than issues of identical credit quality that come from other states that
trade in the general market. One reason for this is that states often exempt interest from in-state
issues from state and local personal income taxes, whereas interest from out-of-state issues is
generally not exempt. Consequently, in states with high income taxes, such as New York and

22. Copyright © 2016 Pearson Education, Inc. 194
California, strong investor demand for in-state issues will reduce their yields relative to bonds of
issuers located in states where state and local income taxes are not important considerations
(e.g., Florida).

21. What can you say about the typical relationship between the yield on short-term and
long-term municipal bonds?

In the Treasury and corporate bond markets, it is not unusual to find at different times either
upward, downward or flat shapes for the yield curve. In general, the municipal yield curve is
positively sloped indicating that short-term bonds have lower yields than long-term bonds. The
most likely explanation is a maturity premium although other reasons could be present including
expectations about inflation and supply versus demand considerations.

22. How does the steepness of the Treasury yield curve compare with that of the municipal
yield curve?

Assume slopes for both Treasury bonds and municipal bonds are upward sloping. If so, then a
steeper municipal yield curve implies that yields for longer term municipal bonds increase more
rapidly than for Treasury bonds. This could be caused if certain factors are more prominent in
the municipal bond market. For example, if longer term municipal bonds are in shorter supply
compared to Treasury bonds, then this factor could lead to greater yields for longer term
maturities for municipal bonds. Consequently, a steeper upward sloping yield curve for
municipal bonds would result. Similarly, if longer term municipal bonds are seen as increasing
more rapidly in terms of credit risk with longer maturities, then the upward slope for yield curves
for municipal bonds would be steeper. Finally, investing in municipal securities exposes
investors to the same qualitative risks as investing in corporate bonds, with the additional risk
that a change in the tax law may affect the price of municipal securities adversely. Since the
impact can be greater for longer term maturities, this could cause yield curve for municipal
bonds to be steeper.

23. Explain why the market for taxable municipal bonds competes for investors with the
corporate bond market.

Like the corporate bond market, taxable municipal bonds are bonds whose interest is taxed at the
federal income tax level. Thus, investors are going to look at the risk and return trade-off to
determine which bond they prefer. Because there is no tax advantage, investors will expect
a higher return for a lower rated bond regardless of whether it is a municipal or corporate bond.
For either a municipal or corporate bond, their yields must be higher than for another tax-exempt
municipal bond. Also, their yields must be higher than the yield on U.S. government bonds
because an investor faces credit risk by investing in either bond.

24. What is the yield ratio and why is it typically less than 1?

Because of the tax-exempt feature of municipal bonds, the yield on municipal bonds should be
less than that on Treasuries with the same maturity. Thus, we should typically get a number less
than one when comparing the yield on municipal bonds to the yield on Treasury bonds with the

23. Copyright © 2016 Pearson Education, Inc. 195
same maturity. This can be seen by examining the below equation for the yield ratio:

yield ratio = yield on municipal bond
yield on same maturity Treasury bond .

We can add that the yield ratio varies over time. For example, according to Bloomberg, from
April 28, 2001, to August 31, 2006, the yield ratio for AAA 20-year general obligation bonds
ranged from 82.5% on May 31, 2005, to a high of 101% on June 30, 2003, with an average yield
ratio of 90.6%. This, while not the typical occurrence, the yield ratio can sometimes exceed 1.

25. Answer the below questions.

(a) What is a Build America Bond?

Despite the excellent performance of the municipal bond sector in terms of credit risk, in 2008
state and local governments and their agencies faced financial difficulties. To provide assistance
to these municipal entities, the American Recovery and Investment Act of 2009 authorized the
issuance of a new type of taxable municipal bond, Build America Bonds (dubbed BABs). A BAB
is a taxable municipal bond wherein the issuer is subsidized for the higher cost of issuing
a taxable bond rather than a tax-exempt bond in the form of a payment from the U.S. Department
of the Treasury.

(b) What is the current status of the federal government program authorizing the issuance
of such bonds?

From the time of the program's inception in April 2009, through the end of the program at the
end of 2010, a total of $181 billion of Build America Bonds were issued. Under this program, the
payment made by the federal government to the issuer is equal to 35% of the interest payments.
Issuance of BABs significantly increased the size of the taxable sector of the municipal bond
market during its operations in 2009 and 2010. Although the program has been terminated, there
is considerable supply of BABs outstanding. There have been various proposals in Congress to
reinstitute this program.

24. Another Random Scribd Document
with Unrelated Content

25. Hemmed in by four hundred pushing, threatening, cursing, human
wolves, those agents of prohibition whitely sat and shivered. They
knew their peril; also they felt that sense of utter helplessness which
will only come to men when forced to face the brainless fury of a
mob. What should be done? What could be done? In that moment of
extremity the proprietor of the boarding-house, with the fear of
death upon him, could think of nothing beyond sending for Mr.
Wright.
To be courier in this hour of strain a girl of twelve was sent out by a
rear door. There was craft in this selection of a messenger. No
Western mob, however bloody of intention, would dream of
interfering with a girl. Besides, Mr. Wright would never refuse a girl’s
request.
Mr. Wright might have been as pleased had he not been called upon.
To oppose the insurrectionists was neither a work of pleasure nor of
safety, and the opportunity to thus put himself in feud with a half
regiment of men whose blood was up, and with whom when the
smoke of battle blew aside he must still do business, could not be
called a boon. But the little girl’s lips were blue with terror, and her
frightened eyes showed round and big, as she besought Mr. Wright
to save the life of her father—it was he to be proprietor of Gallon’s—
and the lives of those visiting gentlemen, representative of
prohibition. Getting wearily up from the poker game in which he was
employed, Mr. Wright made ready to go with the little girl.
“You had better come too, Bat,” said Mr. Wright, addressing Mr.
Masterson. “I think you can do more with a Dodge mob than I can.
They’ve seen more of your shooting.”
“Of course I’ll go, Bob,” returned Mr. Masterson, laying down a
reluctant hand in which dwelt a pair of aces—a highly hopeful pair
before the draw!—“of course I’ll go. But it seems hard that I must
leave just when the hands are beginning to run my way. I wish Bear

26. Creek had put off this uprising another hour. I’d have been a mile on
velvet.”
When Mr. Masterson and Mr. Wright arrived at the seat of war, the
mob was more or less impressed and its howls lost half their volume.
Mr. Masterson and Mr. Wright walked through the close-set ranks,
and went in by the front door. No back door for Mr. Masterson and
Mr. Wright; especially under the eyes of ones whom they must
presently outface.
“What is your desire, gentlemen?” asked Mr. Masterson, when he
and Mr. Wright found themselves with the beleaguered ones.
“There is a train in an hour and thirty minutes,” replied the Attorney
General. He showed the colour of a sheet, but his upper lip was
stiffer than was that of his companion, which twitched visibly. “Can
you put us aboard?”
“Now I don’t see why not,” returned Mr. Masterson.
“Don’t see why not!” exclaimed the President of the Prohibition
League; “don’t see why not! You hear those murderers outside, and
you don’t see why not!” It should be mentioned in the gentleman’s
defence that his nerves were a-jangle. “Don’t see why not!” he
murmured, sinking back as a deeper roar came from without.
“Don’t let the racket outside disturb you,” said Mr. Masterson in a
reassuring tone. “We’ll manage to get that outfit back in its corral.”
“But do you guarantee our safety?” gasped the other.
“As to that,” returned Mr. Masterson, “you gentlemen understand
that I am not issuing life insurance. What I say is this: Whoever gets
you will have to go over me to make the play.”
Mr. Masterson and Mr. Wright conversed apart. There was no haste;
the mob would confine itself to threats and curses while they

27. remained in the house.
“Perhaps I’d better give ’em a talk, Bob,” said Mr. Masterson, at the
close of their confab. “There are two things to do. We must get rid
of Bear Creek. And we must let it look like the rest of ’em had taken
a trick. I think I’ll suggest that we make our visitors give us those
temperance speeches. They won’t want to do it; and if we let the
boys sort o’ compel them to be eloquent, they’ll most likely quit
satisfied. If we don’t do something of the kind, it’s my opinion they’ll
take a shot at us before ever we place these shuddering strangers
on the train.”
“Do what you reckon best,” returned Mr. Wright. “I’ll back your
game.”
Mr. Masterson opened the front door and, with Mr. Wright, stepped
forth. He considered the mob a moment with a quiet eye, and then
raised his hand as if to invite attention.
“Gentlemen,” said he, “if I talk to you, it’s on your account. The
people inside, in whose honour you’ve assembled, intend to board
the first train for the East.”
“Board nothin’! Let’s swing ’em off!” cried a cowboy from south of
the river. He was carrying his lariat in his hand; as he spoke he
whirled the loop about his head, knocking off the sombreros of those
nearest him. “Let’s swing ’em off!” he shouted.
“I’ll swing you off, if you don’t give that rope a rest!” returned an
irate one, unhatted, and with that he collared the child of cows, and
threw him backward into the press. “Go on, Bat,” said this auxiliary,
having abated the cowboy and his rope; “give us the layout of your
little game.”
“My little game,” continued Mr. Masterson calmly, “is this: I’ve passed
my word that no harm shall come to these people. And for this
reason. If they were even a little injured, the prohibition papers

28. would make bloody murder of it. Inside of hours, the soldiers from
the Fort would be among us, and the town under martial law. They
would be sending you prairie dogs to bed at nine o’clock, with a
provost marshal to tuck you in; and none of you would like that. I
wouldn’t like it myself.”
“Let the soldiers come!” shouted Bear Creek Johnson from the
extreme wing of the mob. Bear Creek had drawn from the whiskey
under his belt a more than normal courage. Moreover, he felt that it
was incumbent upon him to make a stand. Considering those plans
he had laid, and which included driving Mr. Masterson out of town
should he have the impudence to stand in their way, Bear Creek
knew that otherwise he would be disparaged in the estimation of his
followers and suffer in his good repute. He resolved to put forward a
bold face, and bully Mr. Masterson. “Let the soldiers come!” Bear
Creek repeated. “We won’t ask Bat Masterson to give us any help.”
“Is that you, Bear Creek?” observed Mr. Masterson, turning on that
popular idol.
Mr. Masterson stepped off the porch and walked down upon the
grass. This brought Bear Creek clear of the herd. No one, in case
Bear Creek became a target, would be in line of Mr. Masterson’s fire.
Bear Creek noticed this as something sinister.
“I reckon now,” continued Mr. Masterson, still edging in between
Bear Creek and his reserves, “that in case of trouble, you would take
command, and run the soldiers out.” Then, solemnly, while Mr.
Wright from the porch scanned those to the rear of Mr. Masterson
for an earliest hostile sign: “Bear Creek, you’ve been holding forth
that you’re a heap bad, but I, for one, am unconvinced. I
understand how you snuffed out the soldier at Fort Lyons; but I also
understand how that soldier was dead drunk. I’ve likewise heard
how you bumped off the party on the Cimarron; at the same time
that party was plumb tender and not heeled. Wherefore, I decline to
regard those incidents as tests. You must give Dodge a more

29. conclusive proof of gameness before you can dictate terms to the
camp. You’ve got your irons! What do you wear ’em for?”
As though to point the question, Mr. Masterson’s six-shooter jumped
from its belt, and exploded in the direction of Bear Creek. The big
bullet tore the ground two inches from his right foot. With a screech
of dismay, Bear Creek soared into the air.
Even while Mr. Masterson was talking, Bear Creek Johnson’s fortitude
had been sweating itself away. The catlike creeping in between him
and his constituents had also served to unhinge him. Indeed he was
in such frame that the sudden explosion of Mr. Masterson’s pistol
exploded with it his hysteria. Bear Creek could do nothing but make
the shameful screeching leap described.
Away went his nerves like a second flock of frightened sheep when,
just as he felt the grass again beneath him, there came a second
flash, and a second bullet buried itself in the ground, grazing his left
foot. Bear Creek made another skyward leap, and evolved another
horror-bitten screech to which the first was as a whisper. When he
came down, a third bullet ripped a furrow between his legs.
Bear Creek Johnson had so far recovered possession of himself that
at the third shot he didn’t leap. He ran. The ignoble Bear Creek fled
from the blazing Mr. Masterson with a speed that would have
amazed the antelopes.
“It’s as I thought!” remarked Mr. Masterson, regretfully; “quit like a
dog, and never even reached for his gun!” Then, returning to the
public, which had been vastly interested by those exercises in which
Bear Creek had performed, Mr. Masterson resumed. “As I was
saying, when Bear Creek interrupted me, I’ve given my word to the
folks inside that they shall not meet with injury. But there’s one
matter upon which, if you’ll back me up, I’d like to enter.” At this,
certain scowls which wrinkled the brows of the more defiant, began
to abate by the fraction of a shadow. “These men,” went on Mr.

30. Masterson, “made boasts before they came here that they would
speak on temperance and prohibition. I understand, from what they
now say, that they have given up this design. I don’t like that. I
don’t want them running into the papers with a lie about the
lawlessness of Dodge, and how we wouldn’t permit free speech. If I
were you, I’d have these Ciceros out, cost what it might, and they’d
either make those speeches or give a reason why.”
“You’re dead right, Bat,” cried one enthusiast. “Smoke ’em out! Make
’em talk! If they’ve got anything ag’inst whiskey, let ’em spit it out. I
don’t owe whiskey a splinter; an’, you bet! these trantlers ain’t goin’
back to Topeka, poisonin’ the public mind, and putting it up that
Dodge wasn’t safe to talk in.”
“Taking the gentleman’s remarks,” observed Mr. Masterson gravely,
“as reflecting the common sentiment, I move you that Mr. Wright be
instructed to go to our visitors and say that we’re waiting with
impatience to hear them on the dual topics of temperance in its
moral aspects, and prohibition as a police regulation of the State.
Those in favour say, Ay!”
There was a thunder-gust of Ays!
“The Ays have it,” confirmed Mr. Masterson. “Bob, will you go inside
and get the muzzles off the orators? When ready, parade ’em before
this enlightened and sympathetic audience, and tell ’em they’ve
never had such a chance to distinguish themselves since the
Mexican War.”
Mr. Wright withdrew in submission to instructions. While he was
absent, Mr. Masterson indulged his audience with a few more words,
lowering his voice as though what he said were confidential.
“Mr. Wright,” remarked Mr. Masterson, “will shortly appear with our
visitors. During the exercises, I trust that nothing trenching upon
disturbance will be indulged in. I shall preside; and I need not call
attention to the fact that there are still three cartridges in my gun.

31. Also, I might add that I don’t always shoot at a party’s moccasins
and miss.”
It was the only thing they could do. With Mr. Masterson and Mr.
Wright to give them courage, and despair to lend them grace, those
visiting ones spake upon whiskey as the Devil’s broth and the
hideous evils of intemperance. All things considered, they made
excellent addresses. Not the best that was in them, perhaps; but
what then? Patrick Henry would have fumbled for a word were he to
feel that at any moment an auditor might step forward and edit a
faulty sentence with his Colt’s. It is to the glory of Dodge, that the
orators were broken in upon by nothing more lethal than applause,
while each was made prouder by a whirlwind of cheers when he
closed.
It was evening in the Alhambra. Those prohibition folk were distant
by one hundred safe and healthful miles, and Dodge had returned to
the even tenor of its ways. Suddenly Mr. Wright delivered himself of
this reproof.
“There’s one fault I’ve got to find, Bat; there’s one thing I won’t get
over soon. Why, I ask you, why, when you had him dead to rights,
did you miss that Bear Creek?”
“I know how you feel, Bob,” returned Mr. Masterson in a manner of
self-reproach, “and I despair of framing up an apology that will
square me with Dodge. Why didn’t I down Bear Creek? It will sound
childish”—here Mr. Masterson’s eye took on a twinkle that was sly
—“but, Bob, I’m no longer sheriff; and, between us, I’m afraid I
don’t shoot true in my private capacity.”

32. CHAPTER XIII—THE RESCUE OF CIMARRON
BILL
Opinion has been ever divided as to the true reason of Ogallala’s
objection to Cimarron Bill. Some there were who said it was born of
Ogallala’s jealousy of Dodge, the latter metropolis being as all men
know the home of Cimarron. Others held it to be offspring of the
childish petulance of Ogallala, which resented the unseemly luck of
Cimarron who had played at cards with its citizens. The latter would
appear the better solution; for when the committee, which consisted
of Mr. Jenkins of the Sheaf of Wheat Saloon, Mr. Sopris and Mr.
Smart, notified Cimarron to depart, the ostracism was expressly
based upon the good fortune which throughout four nights of draw-
poker had waited upon the obnoxious one.
The committee, in a spirit of fairness that did it credit, explained how
Ogallala did not intend by its action to accuse Cimarron of having
practiced any fraud. Had such been the case, Ogallala would have
hanged him instead of bidding him depart in peace. What was
meant came to be no more than this: Ogallala was new and small,
and per consequence poor, and could not afford the luxury of
Cimarron’s presence. Under the circumstance the committee urged
him to have avail of the first train that passed through. Leaving with
him a time table and the suggestion that he study it, the committee
withdrew.
Cimarron Bill was possessed of many of the more earnest
characteristics of a bald hornet. Also, he held that the position
assumed towards him by Ogallala was in violation of his rights under
a scheme of government which guaranteed him life, liberty and the
pursuit of happiness. The last franchise in particular he construed as

33. covering in his favour the privilege of remaining what space he
pleased in Ogallala, and diverting himself with cards at the expense
of those members of the body politic willing to play with him.
Thinking on these lines, he resolved to defy the sentiment of
Ogallala, and stay where he was.
In preparation for what might happen, Cimarron Bill repaired to the
Midland Hotel and got his six-shooter, which weapon, in compliment
to Ogallala, he had theretofore avoided wearing. Being girt for his
defence, he wended to the Arcade, a place of refreshment next
neighbour to Mr. Jenkins’ Sheaf of Wheat, and seating himself at a
table called calmly for a drink. Word of these manoeuvres was
conveyed to Mr. Jenkins, who as chairman of the notification
committee felt compelled to vindicate the dignity of Ogallala.
It was an hour later and, being in the hot middle of an August
afternoon, the Sheaf of Wheat was deserted. Likewise was the
Arcade, save for the presence of Cimarron Bill. Mr. Jenkins made
sure of this by glancing through the window of the Arcade when
returning from a brief invented trip to the post-office.
Believing that the time to move had come, Mr. Jenkins arranged a
shotgun on the shelf below the level of the Sheaf of Wheat bar.
There was a charge of buckshot in each barrel, and Mr. Jenkins
entertained hopes of what might be accomplished therewith. When
fully organised, Mr. Jenkins took a six-shooter and blazed away at
the floor. He relied on the curiosity of Cimarron, certain in this
fashion to be aroused, to bring him within range.
Mr. Jenkins was so far correct as to the inquisitive nature of
Cimarron Bill that the smoke was still a-curl about the low ceiling of
the Sheaf of Wheat when the latter came rushing through the door.
But the door of Cimarron’s advent was the rear and not the front
door, as had been confidently anticipated by Mr. Jenkins. He had
dropped the six-shooter and caught up the Greener with a purpose
of potting Cimarron the moment he appeared. This reversal of

34. doors, however, was so disconcerting that in the hurry of wheeling,
and because of the nearness of Cimarron, he missed that lively
gentleman altogether.
Cimarron Bill replied to Mr. Jenkins with his Colt’s-45, and the bullet
glancing on the fore-end of the Greener cut away the second, third
and little fingers of Mr. Jenkins’ left hand. The blow to his nervous
system sent Mr. Jenkins to the floor, where, being a prince for
prudence and no mean strategist, he remained a-sprawl, feigning
death. This pretense imposed upon Cimarron who, after helping
himself to a drink at the expense, as he supposed, of Mr. Jenkins’
estate, shot a hole through the bar mirror in registration of his
contempt, and sauntered into the street.
Mr. Jenkins, following the going of Cimarron Bill, scrambled to his
feet, thrust a fresh cartridge into the empty barrel of the Greener,
and hastened to the door. Having advantage of the back of
Cimarron, that personage being distant forty yards, he poured a
charge from the Greener into him. As Cimarron went down, Mr.
Jenkins—who was no one to slight his work—unslewed the second
barrel. It went wild, and did no scathe beyond sending one buckshot
through the Ogallala Harbinger, which Mr. Sopris, chair tilted against
the front of the Cowboy’s Rest, was reading, while the balance of
the load shattered the front window of that justly popular resort. Mr.
Jenkins, believing that the honor of Ogallala had been retrieved,
sought the local doctor, while several unengaged members of the
public gathered about the prostrate Cimarron.
The luck which had attended upon Cimarron Bill during his stay in
Ogallala did not abandon him in his off-and-on duel with Mr. Jenkins.
Sundry of those cartridges which were as the provender of the
Greener had been filled with bird not buckshot, being designed for
the destruction of prairie hens. Mr. Jenkins, in the hurry of reloading
that right barrel, had selected a prairie-hen cartridge. So far from
resembling one of those diminutive fowls, Cimarron was a gentleman
of vitality and powers of recuperation. The birdshot peppered but did

35. not kill. Even as they gazed, those who surrounded Cimarron
observed signs of returning life.
This revival of the stricken one bred sorrow in the Ogallala heart; not
because of an innate inhumanity, but, as events had adjusted
themselves, it would have been better had Mr. Jenkins extinguished
Cimarron. There is that unwritten jurisprudence of the gun; and the
politer, not to say more honourable, technicalities were peculiarly on
the side of Cimarron. If the story were sent abroad it would serve for
the discredit of Ogallala; and a western town is as nervously
concerned for its good fame as any woman. Hence the popular
sadness over Cimarron’s restoration.
Acting for the best under circumstances so discouraging, the public,
first caring for Cimarron’s pistol in order to preserve a future’s quiet,
formally placed him under arrest. Then, since Ogallala had no jail
and because he lay wounded to helplessness, he was conveyed to
the Midland, and Mr. Smart detailed to hold him prisoner. In these
steps it is believed that Ogallala planned nothing beyond a version of
the affair that should bear upon its own repute as lightly as it might.
Beyond saving its skirts from criticism, it would restore Cimarron to a
pristine health, and finish by devising ways and means, honourable
of course to Ogallala, for letting him go free.
When the doctor had tied up the three finger-stumps of Mr. Jenkins,
he repaired to the Midland and picked the shot—number eight, they
were—out of Cimarron. Following these improvements, the latter
called for a drink; then, addressing himself to Mr. Smart, he
exhausted invective upon Ogallala and her manner towards
sojourners within her limits.
Cimarron Bill was still in bed and still reviling Ogallala when Mr.
Masterson was given a recount of his troubles. Aside from their
several years of friendship, it chanced in times gone by that during a
dance-hall rumpus at Tascosa, Cimarron Bill had stood over Mr.
Masterson, on the floor with a bullet-shattered knee, and with six-

36. shooters spitting fire held the crowded foe at bay. This, according to
the religion of Mr. Masterson, made a claim upon his gratitude which
would last while Cimarron lived. Wherefore, and because a Western
gratitude is never passive, Mr. Masterson no sooner heard of
Cimarron’s plight than he started to his relief.
Since he must go by roundabout trails, it was precisely one week
from the day of Cimarron’s battle with Mr. Jenkins before Mr.
Masterson drew into Ogallala, and wrote “William Brown, Hays City,”
in the account book which the Midland employed in lieu of a more
formal register. Also, Mr. Masterson developed an unusual
fastidiousness, and asked to be shown the rooms before one was
assigned him. The request being complied with, Mr. Masterson in his
ramble located Cimarron’s room by locating Mr. Smart, who stood or
rather sat on guard at the door—for Mr. Smart had brought out a
chair to comfort his watch and ward—and chose the room next to it.
“Thar’s a prisoner in thar,” doubtfully observed the proprietor of the
Midland, who was acting as guide to Mr. Masterson’s investigations,
“an’ as he mostly cusses all night, he may disturb you.”
“Disturb me?” repeated the bogus Mr. Brown. “Never! I know of
nothing more soothing to the slumbers of an honest man than the
howls of the wicked under punishment.”
Being installed, Mr. Masterson’s earliest care was to provide himself
with a demijohn of Midland whiskey; for he had noted an
encarmined nose as a facial property of Mr. Smart, and that florid
feature inspired a plan. There would be a train from the West at
three o’clock A. M.; it was now two o’clock P. M. This would give Mr.
Masterson thirteen hours wherein to ripen his device; and thirteen is
a fortunate number!
When Mr. Masterson passed Mr. Smart in the hall, bearing—as the
Greeks bore gifts—that engaging demijohn, he spake casually yet
pleasantly with Mr. Smart; and next, after a fashion perfect in the

37. West, he invited Mr. Smart to sample those wares which the
demijohn contained. Mr. Smart tasted, and said it was the Midland’s
best. Upon this promising discovery Mr. Masterson proposed a
second libation, which courtesy Mr. Smart embraced.
Mr. Masterson apologized to Mr. Smart for a thoughtlessness that
had asked him to drink with a total stranger. He made himself known
to Mr. Smart as “Mr. Brown of Hays.” Mr. Masterson remarked that he
would go abroad in Ogallala about the transaction of what mythical
business had brought him to its shores. Meanwhile, the demijohn
was just inside his door. Would Mr. Smart do him the honour to
cheer his vigils with such references to the demijohn as it might
please him to make?
Mr. Masterson was about to depart when a volley of bad words was
heard to issue from Cimarron’s room. The voice was strong and full,
and fraught of a fine resolution; this delighted Mr. Masterson as
showing Cimarron to be in no sort near the door of death. A second
volley climbed the transom to reverberate along the hall, and Mr.
Masterson, jerking the thumb of inquiry, asked:
“Any gent with him?”
“No,” responded Mr. Smart, leering amiably, albeit indefinitely, “no;
he’s plumb alone. He’s jes’ swearin’ at a mark.”
When Mr. Masterson returned he found Mr. Smart blurred and
incoherent. It was no part of Mr. Masterson’s policy to reduce Mr.
Smart to a condition which should alarm the caution of Ogallala, and
cause it to relieve his guard. Mr. Smart was the man for the place; to
preserve him therein, Mr. Masterson withdrew the demijohn from
circulation.
Mr. Smart, even through the happy mists which enveloped him,
spoke well of this step. After supper, the demijohn could be recalled.
The friendship which Mr. Smart and Mr. Masterson had conceived for
one another might then be expanded, and its foundation deepened

38. and secured. Thus sufficiently if not distinctly spake Mr. Smart; and
Mr. Masterson coincided with him at every angle of his argument.
It was nine o’clock, and supper had been over two hours when Mr.
Masterson again sought Mr. Smart at that gentleman’s post in the
hall. Mr. Masterson had much to talk about. The more he had seen
of Ogallala the better he liked it. As for Mr. Smart, he was among
Ogallala’s best features. It had become Mr. Masterson’s purpose to
go into business in Ogallala. Possessing boundless capital, he would
engage in every scheme of commerce from a general outfitting store
to a corral. Mr. Smart should be with him in these enterprises. While
Mr. Masterson dilated, Mr. Smart drank, and the pleasant character
of the evening was conceded by both.
At one A. M. Mr. Masterson supported Mr. Smart to his cot in
Cimarron’s room. The invalid roused himself to say more bad words
of both Mr. Smart and Mr. Masterson; for the room being unlighted,
he assailed Mr. Masterson ignorantly and in the dark. Mr. Smart no
sooner felt the cot beneath him than he fell into deep sleep, and his
snorings shook the casements like a strong wind.
At half after two Mr. Masterson stepped confidently into Cimarron’s
room. He found Mr. Smart as soundly asleep as a corpse. Mr.
Masterson shook Cimarron gently by the shoulder:
“Steady!” he whispered.
“Is that you, Bat?” Cimarron asked, coming at once to an
understanding of things.
“How hard are you hit?” asked Mr. Masterson. “Can you walk?”
“I’m too stiff and sore for that.”
“Then it’s a case of carry.”

39. It was within five minutes of the train. Mr. Masterson wrapped the
wounded Cimarron in the bed-clothes; thus disguised he resembled
a long roll of gray army blankets.
Being a powerful man, Mr. Masterson tossed Cimarron over his
shoulder, and started down the stair. The injured one ground his
teeth with the anguish of it, but was as mute as a fox. There was
still a drunken voice or two in the barroom of the Midland, but Mr.
Masterson—who had looked over the route in the afternoon—
eliminated whatever risk existed of meeting anyone by making for a
side door.
Once in the dark street, by circuitous paths, Mr. Masterson sought
the station. He did not go to the depot proper, but found a place a
little distance up the track, where the smoking-car would stop. Also,
he took the side opposite to that on which passengers got on and off
the train. There he waited in the deep shadow of a line of freight
cars, supporting the drooping Cimarron against the nearest car. The
two were in time; Mr. Masterson could see the headlight, and hear
the scream of the engine.
The express swept in and stopped; by the best of best fortunes the
forward platform of the smoking-car paused squarely in front of Mr.
Masterson and Cimarron. Cautiously Mr. Masterson picked up his
charge and placed him upon the topmost step. Then he swung
himself aboard and made ready to drag Cimarron inside. The latter
met the situation in a manner excessively limp and compliant; for all
his iron nerve, he had fainted.
As Mr. Masterson bent over Cimarron, some unauthorized person
came from out the darkness.
“Whom have you got there?”
As the one in search of knowledge hove in reach, Mr. Masterson
smote him upon the head with his heavy eight-inch pistol. The
inquiring one went over backward, and Mr. Masterson was pleased

40. to see that he fell free of the wheels. Yes, it was right; the unknown
had sinned the sin of an untimely curiosity.
The engine whistled, the train moved, and Mr. Masterson packed the
unconscious Cimarron into the car and placed him in the nearest
seat. There were half a dozen passengers scattered about; all were
soundly slumbering. Mr. Masterson drew a breath of relief, and
wiped his face; for the night was an August night and the work had
been hot. Then he rearranged Cimarron’s blankets, and threw a
cupful of water in his face by way of restorative. That, and the
breeze through the lifted window, caused Cimarron to open his eyes.
“Give me some whiskey.”
Mr. Masterson looked conscience-stricken.
“I forgot the whiskey!”
“Forgot the whiskey!” repeated Cimarron, in feeble scorn. “What kind
of a rescue party do you call this? I’d sooner have stayed where I
was! Besides, I had it laid out how I’d finish shootin’ up that Jenkins
party the moment I could totter over to the Sheaf of Wheat.”
Mr. Masterson, to whom the petulance of the sick was as nothing,
vouchsafed no return, and Cimarron sank back exhausted.
When the conductor appeared, the wary Mr. Masterson met that
functionary in the car door.
“Got any children?” asked Mr. Masterson.
“Five,” said the conductor, whom it is superfluous to say was a
married man; “five; an’ another in the shops.”
“The reason I ask,” observed Mr. Masterson, “is that my brother over
there has measles, and I wouldn’t want you to go packing it back to
your babies. I have to wrap him up to keep him from catching cold.

41. The doctor said that if he ever caught cold once we’d have some
fun.”
While Mr. Masterson was exploring Ogallala and perfecting his
scheme of rescue, he had purchased tickets to Grand Island. He
bought tickets to Grand Island because he intended to get off at
North Platte; the ticket-buying was a ruse and meant to break the
trail. The conductor, as he received Mr. Masterson’s tickets, thanked
him for his forethought in defending his children from the afflicted
brother.
“I’m a father myself,” said Mr. Masterson, who in amplification of any
strategy was ever ready to round off one mendacity with another.
The dawn was showing when the train drew in at North Platte.
Shouldering the helpless Cimarron, Mr. Masterson stepped onto the
deserted station platform. Cimarron gave a querulous groan.
“Where be you p’intin’ out for now?” he demanded. “I’m gettin’ a
heap tired of this rescue. It’s too long, an’ besides it’s too
toomultuous.”
“Tired or no,” responded Mr. Masterson, steadily, “you’re going to be
rescued just the same.” The Cochino Colorow was a gentleman
whose true name was Mr. Cooper. He had been rebaptised as the
“Cochino Colorow,” which means the “Red Hog,” by the Mexicans
and the Apaches when he was a scout for General Crook, and about
the time the latter gained from the same sources his own title of the
“Gray Fox.”
Mr. Cooper was not heralded as the Cochino Colorow because of any
aggressive gluttonies; but he was round and with a deal of jowl, and
suffered from a nose that, colour and contour, looked like the ace of
hearts. Besides, Mr. Cooper had red hair. These considerations
induced the Mexicans and Apaches to arise as one man and call him
the Cochino Colorow; and the name stuck.

42. Mr. Masterson and the Cochino Colorow had been fellow scouts
under the wise Ben Clark when the latter guided the Black Kettle
wanderings of General Custer. Since then the Cochino Colorow had
adopted more peaceful pursuits as proprietor of the Bank Exchange
in North Platte, and on the morning when Mr. Masterson, with
Cimarron over his shoulder like a sack of oats, came seeking him, he
was a familiar as well as a foremost figure of that commonwealth.
The Bank Exchange was almost empty of customers when Mr.
Masterson and his burden arrived; a few all-night souls were still
sleepily about a faro table, and the Cochino Colorow himself was
behind the box. “Hello, Bat!” exclaimed the Cochino Colorow,
manifestly surprised, and turning the box on its side to show a
recess in the deal. “Where in the name of Santa Ana do you come
from? What’s that you’re totin’?”
“I’m totin’ a friend,” replied Mr. Masterson.
The Cochino Colorow hastily assigned a talented person who was
keeping the case, to deal the interrupted game, while he in person
waited upon the wants of the fugitives. Mr. Masterson told the story
of their adventures to the Cochino Colorow.
“And for all my walking in the water about those tickets,” concluded
Mr. Masterson, “I’m afraid the Ogallala outfit will cross up with us
before ever I can freight Cimarron into Dodge. The moment that
drunkard Smart comes to, or the rest of ’em find they’re shy
Cimarron, they’ll just about take to lashing and back-lashing the
situation with the telegraph, and I figure they’ll cut our trail.”
“Which if they should,” confidently returned the Cochino Colorow,
“we’ll stand ’em off all right. Between us, I’m the whole check-rack
in North Platte.”
Mr. Masterson’s fears were justified. As early as the afternoon of the
same day, Mr. Sopris and a companion, whom Mr. Masterson,
because of the handkerchief which bound his brows, suspected to be

43. the inquisitive one, walked into the Bank Exchange. Mr. Masterson
and the Cochino Colorow had remarked their approach from a
window while they were yet two blocks away.
“Is either of ’em that Jenkins crim’nal?” asked the Cochino Colorow.
“No,” said Mr. Masterson.
“I’m shore sorry,” replied the Cochino Colorow. “If one of ’em now
was that Jenkins crim’nal, we’d nacherally prop pore Cimarron up by
this yere window, an’ let him have a crack at him with my
Winchester.”
The Cochino Colorow suggested that Mr. Masterson retire to the
room where lay the invalid Cimarron. He said that he could best
treat with the visitors alone.
Cimarron was tossing to and fro on a couch in a cubby-hole of an
apartment immediately to the rear of the Bank Exchange bar. Since
the intervening partition was of pine boards, an inch for thickness,
what passed between the Cochino Colorow and the invaders fell
plainly upon the listening ears of Mr. Masterson and Cimarron.
The visitors laid bare their mission. They set forth the escape of
Cimarron; and while they would not pretend that Ogallala hungered
to destroy that individual, they did urge a loss to the Ogallala honour
if he were permitted to walk off in a manner of open, careless
insolence.
“It ain’t what this Cimarron does,” explained Mr. Sopris; “it ain’t that
he’s done more’n shoot away three of Jenks’ fingirs, an’ as they was
on the left hand, they may well be spared. What Ogallala objects to
is the manner of this person’s escape. It not only puts Mr. Smart in
the hole, speshul, but it reflects on Ogallala for hoss sense.”
“Well, gents,” returned the Cochino Colorow with cool nonchalance,
“you can’t expect me to bother myse’f to death about what comes

44. off in Ogallala. Which, speakin’ general, I’m that numbed by my own
misfortunes, I don’t care much what happens, so it don’t happen to
me.”
“It wasn’t,” retorted Mr. Sopris, “that we allowed you’d feel a heap
concerned, but we got a p’inter that you’re harborin’ these yere
felons personal.”
“Is that so?” observed the Cochino Colorow, assuming airs of chill
dignity. “Gents, since you impugns my integrity, my only word is,
‘Make your next move.’”
“Our next move,” observed Mr. Sopris, “will be to go squanderin’
about into the uttermost corners of this yere deadfall, an’ search out
our game.”
“Shore!” exclaimed the Cochino Colorow, picking up a rifle that stood
in the corner. “An’ bein’ plumb timid that a-way, of course I’ll neither
bat an eye nor wag a year ag’in the outrage.”
The Cochino Colorow cocked the Winchester. Mr. Sopris shook his
head, as might one whose good nature had been abused.
“That’s plenty!” said Mr. Sopris. “Since sech is your attitoode of
voylence, we jest won’t search this joint.”
“No, I don’t reckon none you will,” retorted the Cochino Colorow,
fingering the Winchester. “You two delegates from Ogallala had
better hit the trail for home. An’ don’t you never come pirootin’ into
North Platte searchin’ for things no more.”
Mr. Masterson and Cimarron overheard this conversation, and the
dialogue so affected the latter that Mr. Masterson had his work cut
out to keep him in his blankets. As the colloquy ended and the
retreating footfalls told the departure of the committee from
Ogallala, Cimarron, sore, sick and exhausted, turned his face to the
wall with a sigh of shame.

45. “Bat,” he said, pleadingly, “would you mind leavin’ the room a
moment while I blush?” Then he continued while his tears flowed:
“We’re a fine pair of centipedes to lie bunched up in yere while the
Red Hog plays our hands!”
“They were only four-flushing,” said Mr. Masterson, soothingly, by
way of consolation.
In the corral to the rear of the Bank Exchange stood a ramshackle
phaeton, which was one of the sights that North Platte showed to
tourists. This conveyance belonged to the mother-in-law of the
Cochino Colorow. The lady in question, who was of a precise,
inveterate temper, was in the East visiting relatives, and the Cochino
Colorow, after sundry drinks to convey his courage to the needed
height, endowed Mr. Masterson and Cimarron with the phaeton to
assist them in a cross-country break for Dodge. After this generous
act the Cochino Colorow was troubled in spirit.
“I’ll fight Injuns for fun,” explained the Cochino Colorow, defensively
to Mr. Masterson, “but whether you deems me weak or not, I simply
shudders when I think of my said mother-in-law an’ what she’ll say
about that buggy. But what could we-all do? Cimarron has got to
vamos. Them Ogallala sharps will most likely be showin’ up to-morry
with a warrant an’ a comp’ny of milishy, an’ that vehicle is the one
avenoo of escape. While her language will be mighty intemperate,
still, in the cause of friendship, a gent must even face his mother-in-
law.”
“What do you reckon she’ll do?” asked Mr. Masterson, who was not a
little disturbed by the evident peril of the good Cochino Colorow.
“Mebby Cimarron had better give himself up.”
“No,” replied the desperate one. “It shall never be said that
anything, not even a well-grounded fear of that esteemable lady
whom I honours onder the endearin’ name of mother-in-law, could

46. keep me from rushin’ with her phaeton to the rescue of a friend
beset.”
The Cochino Colorow roped and brought up a mud-hued, ewe-
necked, hammer-headed beast of burden, and said its name was
Julius Cæsar. This animal, which had a genius for bolting one
moment and backing up the next, he hooked to the phaeton.
Cimarron, whose helplessness was not of the hands, could hold the
reins and guide Julius Cæsar. Mr. Masterson would ride a pinto pony
furnished by the generous partisanship of the Cochino Colorow. It
would take a week to make Dodge, and a week’s provisions, solid
and liquid, were loaded into the phaeton.
The faithful Cochino Colorow rode with them on a favourite sorrel as
far as Antelope Springs. Arriving at that water, he bade the travellers
farewell.
“Good luck to you,” cried the Cochino Colorow, waving a fraternal
hand. “Give my regyards to Wright an’ Kell an’ Short.”
“I hope you won’t have trouble with that outfit from Ogallala,”
returned Mr. Masterson.
The Cochino Colorow snapped his fingers.
“Since my mind’s took to runnin’ on my mother-in-law,” he said, “I’ve
done quit worryin’ about sech jim-crow propositions.”
And thus they parted.
It was a week later when Mr. Masterson and the rescued one made
Dodge. When he had seen the suffering Cimarron safely in bed at
the Wright House, Mr. Masterson began looking after his own
welfare at the Long Branch.
“You cert’nly had a strenuous time, Bat,” observed Mr. Short,
sympathetically.

47. “Strenuous!” repeated Mr. Masterson. “I should say as much!
Cimarron was as ugly as a sore-head dog, and wanted everything he
could think of from a sandwich to a six-shooter. I was never so worn
to a frazzle. It was certainly,” concluded Mr. Masterson, replenishing
his glass, “the most arduous rescue in which I ever took a hand; and
we’d have never pulled it off if it hadn’t been for the Cochino
Colorow. Here’s hoping he can square himself with that relative he
robbed. She’s as sour as pig-nuts, and I don’t feel altogether easy
about the Cochino Colorow. However, if the lady puts up too rough a
deal, I told him he’d find a ready-made asylum here.”

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