03.1 Municipal Securities Flashcards
Municipal Securities
Which of the following is associated with the secondary market?
A. Bond Buyer
B. Broker’s broker
C. Notice of sale
D. Bond counsel
Broker’s broker
Rationale:
A broker’s broker executes transactions exclusively with other broker-dealers and not with public investors. Broker’s brokers generally do not take inventory positions in securities. Associate them with secondary market trading.
Which of the following is a true statement?
A. Insured Revenue bonds generally yield less than uninsured Revenue bonds
B. A qualified opinion means the bond counsel is qualified by the State’s Municipal Securities Evaluation Council to render such opinions.
C. Revenue bonds usually mature beyond the useful life of the facilities builtwith the proceeds raised by selling the bonds.
D. GO bonds yield more than Revenue bonds because they are generally riskier
Insured Revenue bonds generally yield less than uninsured Revenue bonds
Rationale:
An insurance policy that protects against default should make the revenue bonds less risky, right?
What may a municipal securities apprentice do during her first 90 days?
A. Solicit orders from a retail customer with principal approval
B. Receive commissions
C. Accept unsolicited orders from a retail customer
D. Receive a salary
Receive a salary
Rationale:
No transactions with the public, end of story, and no commissions. She can be paid a training wage/salary, but she can’t be compensated on the basis of sales until she completes the apprenticeship period and gets the required license (52 or 7).
Which of the following are regulated by the MSRB?
A. FDIC
B. Municipal bond issuers
C. Municipal bond underwriters
D. FINRA
Municipal bond underwriters
Rationale:
The MSRB regulates bank dealers and broker-dealers by
writing all the rules on how the business of underwriting and trading municipal securities is supposed to function. They don’t regulate other Self-Regulatory Organizations, and they can’t tell states and cities (issuers) what to do, either.
Your customer purchases a bond at a discount. The bond
matures in 10 years and has been advance refunded. Which yield would be disclosed on the trade confirmation?
A. Yield to maturity or yield to call, whichever is lower
B. Current yield
C. Yield to call
D. Yield to maturity
Yield to call
Rationale:
Once it’s been advance refunded, it’s going to be called for sure, so you disclose YTC. Maturity isn’t going to be reached, so forget about YTM.
All of the following are associated with the primary market except:
A. Markups
B. Bond Counsel
C. Notice ofSale
D. Syndicate
Markups
Rationale:
Markups are charged on bonds trading in the secondary market. The other three all deal with issuing securities, which is the primary market. The issuer publishes a notice of sale to attract the syndicate. The issuer also appoints the bond counsel to take them through the legality of the process.
The only true statement that follows conerning municipal securities is that:
A. They must be issued with a trust indenture
B. They have no exemption under the Act of 1933
C. They must be sold with a prospectus
D. They usually yield less nominally than corporate bonds
They usually yield less nominally than corporate bonds
Rationale:
Municipal securities are generally much safer than corporate bonds, so they yield less. Less risk = less yield. More risk = more yield. Municipal’s ARE exempt from the Act of 1933 and, therefore, don’t need a prospectus or a cooling off period, etc. The Trust Indenture Act of 1939 only applies to corporate issuers, not municipal issuers.
Which of the following would be included on a “when issued” trade confirmation?
A. Settlement date
B. Dated date
C. Total dollar amount
D. Accrued interest
Dated date
Rationale:
That is all we would know before the bonds have been created and sold to the buyers on the primary market. Until the underwriters sell the bonds to investors, how would we know the settlement date? Therefore, we can’t calculate accrued interest and come up with a total dollar amount. All we know is somebody will receive a certain number of bonds and will pay accrued interest from the dated date up to the day before settlement, whenever we get there.
Your customer is concerned about AMT. You would most likely recommend a municipal bond issued to complete which of the following projects?
A. Convention Center
B. High-end town home community
C. Public school
D. Parking garage
Public school
Rationale:
If you make a certain amount of money, you have to fill out an Alternative Minimum Tax (AMT) form. Some of the stuff you thought you were going to enjoy for tax purposes is going to come back and bite you on the backside now in the form of “tax preference items.’ Interest on what the IRS considers a “non-essential” or “private purpose” bond
will be added to your AMT form, and you’ll be taxed on some or all of it. So, put your AMT customers (most municipal customers are subject to AMT) into general obligation/school bonds. Those are essential. The IRS will play nice on general
Which of the following projects is most likely financed by a General Obligation (GO) bond?
A. Toll-way
B. Freeway
C. Sports stadium
D. Airport
Freeway
Rationale:
The one least likely to generate revenue is the one least likely to be issued with a revenue bond. In other words, if the project generates no revenues it needs to be financed with a GO bond. Schools, freeways, and prisons are likely candidates for GO bonds on the exam.
Which of the following projects funded by municipal bonds is least likely to require voter approval?
A. Building a prison
B. Building a public high school
C. Constructing a toll road
D. Building a public middle school
Constructing a toll road
Rationale:
A turnpike is a revenue generator-people pay big money to use those turnpikes (toll roads). so there’s plenty to pay the bondholders. So, we’ll use revenue bonds for a turnpike, and we don’t need voter approval for those. But schools are backed by taxpayers, who get to vote on the issuance of the GO bonds used to construct and finance schools.
A true statement of call and/or put provisions for municipal securities is that:
A. Bonds experience large price declines when rates fall
B. Bonds are usually called when interest rates rise
C. Put features are usually exercised when interest rates fall
D. Put features are usually exercised when interest rates rise
Put features are usually exercised when interest rates rise
Rationale:
As interest rates rise, bond prices fall. When prices fall, folks who hold puttable bonds often put/sell the bonds back to the issuer for more than they’re currently worth. The other three choices all have it backwards.
Which of the following is a double-barreled bond?
A. Hospital bond backed by revenues and full faith and credit of the issuer
B. A bond backed by the issuer’s full faith and credit
C. Section 8 bond
D. NHA
Hospital bond backed by revenues and full faith and
credit of the issuer
Rationale:
If we point revenues AND full faith and credit at the problem of paying debt service, it’s like we’re aiming a double-barreled shot gun at the sucker. The issuer has to be the one pointing both barrels, though, which is why the other three choices are NOT double-barreled. They’re issued by a city and guaranteed by a different government, the federal government.
An inaccurate statement concerning MSRB regulations is that:
A. An apprentice may not receive commissions
B. An apprentice may receive commissions for retail purchases initialed by a principal
C. Municipal dealers are not required to secure the best price for their customers
D. Trades that did not occur should not be reported
An apprentice may receive commissions for retail purchases initialed by a principal
Rationale:
Just tell the exam that an apprentice may NOT receive commissions, and everybody’ll be happy.
The principal at a municipal securities firm must approve
which of the following?
A. Listings of offerings
B. Abstract of the official statement
C. Preliminary official statement
D. Official statement
Abstract of the official statement
Rationale:
The issuer prepares both preliminary and final official statements, so those aren’t subject
to principal approval. Listings of offerings for the secondary market are just straight-up facts which
bonds for sale at which price. Principals approve advertising, which might be misconstrued by a customer through implications and unintended consequences.
To whom must a customer direct a request for a copy of
the MSRB rulebook?
A. MSRB
B. Fully-registered compliance principal
C. Broker-dealer
D. FINRA
Broker-dealer
Rationale:
All the customer has to do is
ask the firm for a copy of the rulebook, and the firm sends it. We recommend that you read the online version at www.msrb.org. This plus www.bondbuyer.com can really help your understanding of municipal securities, the largest section on the Series 7.
Which of the following is a true statement concerning municipal securities?
A. They are often sold short due to their substantial liquidity
B. They are subject to Reg T requirements
C. Recommending municipal securities to a low-income, low tax-bracket client is a violation
D. They are subject to reporting requirements under the Act of 1934
Recommending municipal securities to a low-income, low tax-bracket client is a violation
Rationale:
Recommending municipal bonds to a low-income, low tax-bracket investor violates the suitability requirements. Municipal’s are for high tax- bracket, high-income customers looking for income, safety, and tax advantages.
Which of the following has liability for unsold bonds?
A. Underwriter in a best efforts underwriting
B. Member of the syndicate in a firm commitment
C. Syndicate manager in a best efforts underwriting
D. Member of the selling group in a firm commitment
Member of the syndicate in a firm commitment
Rationale:
Members of the selling group never have liability. Syndicate
members have liability only in firm commitments, where they’ve agreed to either sell the bonds to investors or buy them themselves.
A “deceased” municipal bond has been:
A. Abdicated
B. Pre-empted
C. Downgraded
D. Pre-refunded
Pre-refunded
Rationale:
“Defeased” can also be referred to as “advance” or “pre-refunded.” A “covenant of defeasance” allows the issuer to advance, or pre-refund an issue of bonds.
When an issue of municipal securities is oversold, orders generally are given the following (from highest to lowest) priority:
I. Designated
II. Syndicate or group net
III. Pre-sale
IV. Member
A. Ill, II, IV, I
B. I, II, III, IV
C. IV, Ill, II, I
D. Ill, II, I, IV
Ill, II, I, IV’
Rationale: Please Sell Da' Muni's: Pre- sale Syndicate Designated Member.
The principal at a municipal securites firm would do all of the following except that he/she would NOT:
A. Approve the preliminary official statement
B. Approve each new account
C. Review the copy of a newspaper advertisement
D. Approve customer transactions
Approve the preliminary official statement
Rationale:
The issuer prepares both the preliminary and official statement. The principal only approves things prepared by
the firm.
All of the following projects would probably be funded with bonds awarded by a competitive sealed bid except
A. Highway
B. Turnpike/tollway
C. Public school
D. Prison
Turnpike/tollway
Rationale:
This is really asking which project is probably funded by a revenue bond. The answer, again, is the turnpike/tollroad project.
Competitive bids would most likely be required when bonds are issued to fund which of the following projects?
A. Public school
B. Golf course
C. Sports stadium
D. Turnpike
Public school
Rationale:
This is really asking which project is probably a general obligation bond, which is usually underwritten under a competitive. sealed bid. A public school is probably the exam’s favorite example of a general obligation bond project.
What would an analyst look at when determining the creditworthiness of a General Obligation bond?
A. Flow of funds statement
B. Public’s attitude toward debt, taxes
C. Debt service coverage ratio
D. Feasibility studies
Public’s attitude toward debt, taxes
Rationale:
A revenue bond would have a flow of funds statement and a feasibility study. GO’s are backed by taxes, so what is the public’s attitude toward carrying debt and paying taxes to cover it?
A municipal securities firm is about to open an account for a registered representative of another municipal securities finn. All of the following actions should be taken by the executing member firm except:
A. Send duplicate trade confirmations to the employing member
B. Notify the employing member in writing
C. Fill out a new account form
D. Obtain written permission from the employing member
Obtain written permission from the employing member
Rationale:
Notification is required, not permission. The firm also has to follow any special instructions the employing broker-dealer sends in writing.
Ashton, North Dakota has issued revenue bonds with an indenture that stipulates that emergency funding from the state legislature would be pursued should debt service exceed available revenues. This describes which type of bond?
A. Emergency fund debenture
B. Double-barreled
C. Moral obligation
D. Sub-subordinated debt
Moral obligation
Rationale:
A “moral obligation” means that the state legislature or city council might appropriate money if the revenues fall a little short. It’s a moral obligation, not a legal requirement. So the investors’ chances of getting money for their bonds is left up to the morality of politicians.
When a customer purchases an OID, he may be required to pay accrued interest:
I. From the settlement date
II. From the dated date
III. Through the day before settlement
IV. Up to the day as determined by the principal of the firm with the largest position
A. I, Ill
B. II, Ill
C. II, IV
D. I, IV
II, Ill
Rationale:
“OID,” means “original issue discount” bond, which gives you the “new issue” clue you need to figure this out. For a new issue, investors often pay accrued interest from the dated date up to-not including-the settlement date.
Which of the following is usually the largest piece of the
underwriting spread?
A. Manager’s fee
B. Additional takedown
C. Total takedown
D. Concession
Total takedown
Rationale:
A nasty question. “Total takedown” includes
TWO pieces additional takedown and concession. Of the three main pieces manager’s fee, additional takedown, concession, the concession would be the largest. The only member Who can make the total spread is the managing underwriter. The maximum that the other members can make is the total takedown, but they have to sell the bond themselves to get both of the pieces included. If they let a selling group member make the sale. they concede that piece to the selling group. Concede = concession, right?
