Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

MY SERIES 7 > Ch 6: Munis > Flashcards

Ch 6: Munis Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 7 Top-off Exam flashcards
1
Q

muni debt financing

A

securities issued by either state/local gov or by US territories

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

how are munis quoted?

A

same as corporates! in fractions of 1/8

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Munis are usually priced and offered for sale on a…

A

YTM basis rather than a dollar price
(this is called a basis quote; bond’s basis = YTM)

Ex: Bond’s basis is quoted at 3.78 basis? The YTM is 3.78%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

100 basis pointst =…

A

100 bps = 1%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What market are munis sold on?

A

OTC market; NOT listed on stock exchanges

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

bona fide quote

A

muni dealer gives, distributes, or publishes a quote for a security

for a quote to be bona fide, or FIRM, the dealer must be prepared to trade the security at the price specified in the quote and under the conditions and restrictions (if any) accompanying the quote. A bona fide quote:

  • must reflect the dealer’s best judgement and have a reasonable relationship to the fair market value (FMA) for that security and
  • may reflect the firm’s inventory and expectations of market direction

**so a quote need NOT rep the best price, but MUST HAVE A REASONABLE RELATIONSHIP TO FMV

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

If a dealer distributes/published the quote on behalf of another dealer in a bonafide quote…

A

it must have a reason to believe that the quote is bona fide and based on the other dealer’s best judgment of FMV. Dealers cannot knowingly misrep a quote made by another muni securities dealer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

***MUNI DEALERS CAN MAKE OFFERS TO SELL SECURITIES BY PROVIDING QUOTES WITHOUT OWNING THE BOND. BUT THE DEAL…

A

MUST KNOW WHERE TO OBTAIN THE BONDS IF THE OFFERS ARE ACCEPTED

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

other types of quotes

A

(most common types: workable indications and nominal quotes)

  • WORKABLE INDICATION - reflects a bid price at which a dealer will buy securities from another dealer; a dealer giving a workable indication is ALWAYS free to revise its bid for the securities as market conditions change
  • NOMINAL/SUBJECT QUOTES - indicates dealer’s est of a security’s market value; nominal quotes are provided for INFO PURPOSES ONLY and are PERMITTED IF QUOTES ARE CLEARLY LABELED AS SUCH (rules on nominal quotes apply to ALL muni bonds distributed or published by any dealer)
  • HOLDING A QUOTE - a muni securities dealer may quote a bond price that’s firm for a certain time. This is called an OUT-FIRM with recall quote. These quotes are usually firm for an hour (or 1/2 hour) with a 5-min recall period, which gives the time a the dealer who requested the quote to search for a better quote before selling the bonds
    (if during these 5 min there’s another buyer of the firm interested in the same bonds, that firm can contact the dealer and give him 5 min to act on the quote. If no action is taken within 5-min recall period, he loses the right to buy the bonds at the quoted price)
  • BW/OW - since munis are not listed on any exchange, they don’t have the same quote and price transparency as other listed securities. So muni dealers are called upon REGULARLY to provide current quotes for munis they don’t have on inventory. When a customer of a muni firm is looking for a specific bond, the dealer will actively solicit offers to sell from the marketplace. If customer has bonds to sell, the dealer will actively solicit bids from the marketplace for those bonds.
  • MUNI MARKETS IN THE SAME SECURITY - Some large fin corps have more than 1 BD under their control; If they publish a muni security quote, it must be clear that this reps only 1 quote, not 2 independent quotes (which would’ve implied greater liquidity)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

***RECEIVING AN OUT-FIRM QUOTE ALLOWS DEALERS TO…

A

try to sell bonds that they don’t own, knowing that if they find a buyer within the allotted time, they can buy the bonds at a fixed price from the firm providing the out-firm quote

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

***Under MSRB, any indication of interest or solicitation by a muni dealer (such as BID WANTED or OFFER WANTED)…

A

would be considered a quote request.

The term QUOTATION means any bid or offer of muni securities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

3 Types of maturity schedules commonly found withh muni debt securities

A
  1. term maturity
  2. serial maturity
  3. balloon maturity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Term maturity

A

ALL principal matures at 1 single date in the future.

Term bonds are quotes BY PRICE (like corporate bonds) and are called DOLLAR BONDS.

To facilitate the retirement of its bonds, a corporate or muni issuer may establish a SINKING FUND operated by the bonds’ trustee.

  • to establish a sinking fund, the issuer deposits cash in an acct with the trustee
  • Trust indenture often requires this sinking fund, which can be used to call bonds, redeemed bonds at maturity, or buy back bonds in the open market.
  • monthly payments are made by the homeowner to ensure that bunds will be available to pay the annual insurance premium and property taxes
  • bc a sinking fund makes money available for paying off the bonds, it can aid the bonds’ marketability and safety
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Serial maturity

A

bonds within an issue mature on DIFFERENT DATES according to a predetermined schedule.

Serial bonds are quoted ON THE BASIS OF THEIR YTM (BASIS QUOTE), to reflect the DIFFERENT MATURITIES within 1 issue.

A price/yield of 100% indicates the YTM=coupon rate, which means the bond is offered at par.

The longer the maturity, the higher the yield.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Balloon Maturity

A

issuer pays part of a bond’s maturity before the final maturity date, but the largest portion is paid off at maturity. (notice, the AMOUNT varies at each pay period)

***A BALLOON MATURITY IS A TYPE OF SERIAL MATURITY. Note, the most muni bonds are issued serially.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

printed on the face of EVERY bond certificate is…

A
  • LEGAL OPINION (which states that the issue is legally binding on the issuer and conform to applicable laws) written and signed by the BOND COUNSEL (an attorney specializing in tax-exempt bond offerings);
  • the legal opinion is either issued either as QUALIFIED OPINION (there may be a legal uncertainty of which the purchaser should be informed) or UNQUALIFIED OPINION (issued by the bond counsel unconditionally)

***ISSUERS DESIRE AN UNQUALIFIED LEGAL OPINION.

some issuers (usually smaller munis) choose not to obtain a legal opinion. In this case, the bond certificate must clearly state the bonds are EX-LEGAL. Meaning it allows a bond to meet good delivery requirements without an attached legal opinion

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

underwrriter’s counsel

A

managing underwriter may choose to employ another law firm as underwriter’s counsel; this firm is not responsible for the legal opinion and is employed to rep the underwriter’s interests

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

list the munis defined by their maturities

A

less than 5 yrs? considered muni notes

longer maturities? muni bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

2 categories of muni bonds

A

GOs and Rev bonds

GOs - backed by FULL FAITH, CREDIT, AND TAXING POWERS of the munis; GOs issued by local (note state) gov units are most often backed by ad valorem taxes
- principal and int must be paid by taxes collected by muni issuer

Rev bonds - backed by the revs generated by muni facilitating the bond issue finances; sometimes rev comes from special taxes (ie. excise taxes or other non-ad valorem taxes)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

GO taxing power - source of funds?

A

states: bonds issued by states are backed by income taxes, license fees, and sales taxes.

Bonds issued by towns, cities, and countries are backed by property (ad valorem) taxes, license fees, fines, and all other sources of rev to the muni. School, road, and park districts may also issue muni bonds backed by property taxes.

Because property of the residents is being taxes, GOs’ frequently required voter approval.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Statuutory debt limits

A

muni gov have debt limits, limited by state/local statutes to protect taxpayers from excessive taxes.

debt limits can also make a bond safe for investors.

Muni CAN issue GOs that put it OVER the statutory limit, but a PUBLIC REFERENDUM IS REQUIRED. Voter approval on the referendum must follow.

  • Tax limits - some states limit property taxes to a certain % of the assessed property value or to a certain % increase in any single yr
  • Limited tax GOs - limited tax GO bond is a bond secured by a specific tax (ie. income tax). Alternatively, the issuer is limited as to what taxes or how much can be used to service the debt. This results in more risk with limited tax GOs than with a comparable GO backed by the full taxing authority of the issuer.
  • Overlapping debt - several tax authorities drawing form the SAM TAXPAYERS can issue debt; bonds issued by different muni authorities that tap the same taxpayer wallets are known as coterminous debt
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

***COTERMINOUS DEBT

A

refers to 2 or more taxing agencies that share the SAME GEOGRAPHIC BOUNDARIES and are able to issue debt separately.

Overlapping debt occurs when 2 or more issuers are taxing the same property to service their respective debt.

Coterm. debt ONLY Occurs in property taxing situations. Bc states do not generally tax real estate, state debt never overlaps.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Rev bonds

A

used to finance any muni facility that generates sufficient income

rev bonds are not subject to statutory debt limits and do not require voter approval.

A particular rev bond issue, however, may be subject to an additional bonds test before a subsequent bond issues with equal liens on the project’s rev may be issued.
- additional bond test ensures the adequacy of the rev stream to pay BOTH OLD AND NEW DEBT

24
Q

feasiblity study

A

various consultants preparing a report detailing the economic feasibility and the need for a particular project

study conducted BEFORE issuing a rev bond

25
Q

sources of rev for Rev Bonds

A

Debt service payments don’t come from general or real estate taxes and are not backed by the muni’s full faith and credit.

Rev bonds are considered self-supporting debt bc principal and interest paym are made exclusively from rev generated by the proj for which the debt was issued.

rev-producing facilities include:

  • utilities (water, sewer, electric)
  • housing
  • transportation
  • education (college dorms and student loans)
  • health (hospitals and retirement centers)
  • industrial (industrial developm and pollution control)
  • sports
26
Q

what document empowers the trustee to act on behalf of the bondholders?

A

trust indenture/bond resolution - muni agrees to abide by certain protective covenants to protect bondh
- trustee appointed in the indenture supervises the issuer’s complaints (?) with the bond covenants

standard provisions on most trust indentures include:

  • rate covenant
  • maintenance covenant
  • insurance covenant
  • additional bonds test (open-ended indenture, which allows further issuance of bonds with the same status and equal claims on A or rev if permitted under bond indenture provision, OR close-ended indenture, allowing no further issuance of bonds with an equivalent lien on A or rev)
  • sinking fund
  • catastrophe clause/calamity call/extraordinary mandatory call - promise to use insurance proceeds to call bonds and repay bondholders if a facility is destroyed
  • flow of funds - priority of disbursing the rev collected
  • books and records covenant - requires outside audit of records and fin reports
  • call features
27
Q

Trust Indenture Act states that trust indentures for munis are…

A

NOT required; but it does greatly increase the marketably of rev issues

rev bonds tend to have trust resolution/trust indenture. whereas GOs tend to have bond resolutions

28
Q

Types of Rev Bonds (list)

A
  • industrial development rev bonds
  • double barreled bonds
  • certificates of participation
  • special tax bonds
  • special assessment bonds/special district bonds
  • new housing authority bonds
  • moral obligation bonds
  • muni notes
  • variable rate muni securities (variable rate demand obligations, auction rate securities)
29
Q

industrial developm rev bonds

A

issued to construct facilities or purchase equipment, which is then leased to a corporation.

muni uses the money from lease payments to pay principal/interest on the bonds.

Bonds carry the corp’s debt rating. Some of these bonds are subject to the alternative min tax (AMT)

30
Q

lease-rental bonds

A

under a typical lease-rental (or lease-back) bond arrangement, a muni issues bonds to FINANCE OFFICE CONSTRUCTION for itself or its state/community

Ex: muni issues bonds to raise money to construct a school and lease the finished building to the school district. Lease payments are the backing of the bonds. Lease payments come from funds raised through special taxes or schools’ tuition/fees etc

31
Q

double-barreled bonds

A

rev bonds that have characteristics of GOs; they’re backed by 2 SOURCES OF REV :

1) interest and principal are paid from a specialty facility’s earnings
2) taxing power of the state/muni

Although they’re backed primarily by rev from the facility, double-barreled bonds are rated and traded as GOs.

32
Q

Certificates of Participation

A

a form of lease rev bonds that permits the investor to participate in a stream of rev from lease, installment, or loan payments related to the acq of land/acq or construction of specific equipment/facilities by the muni)

they (like other rev issues) require no voter approval.

certificates of participation are NOT viewed legally as debt of a muni payment is tied to an annual appropriation that’s made by the gov body. 1 UNIQUE FEATURE WITH THESE CERTIFICATES (rare tho) is that in theory, certificate holders themselves can foreclose on the equipment/facility that the certificates finance int he event of default.

33
Q

special tax bonds

A

secured by 1 or more designated taxes other than ad valorem (property) taxes (ie. sales, tobacco, alcohol, fuel, biz license taxes)

the designated tax does NOT have to be directly related to project purpose! Such bonds are not considered self-supporting debt. Meaning that other sources may be used if the taxes generated are insufficient. You might see these called designated tax bonds.

34
Q

Special Assessment Bonds (or Special District Bonds)

A

issued to finance the construction of PUBLIC IMPROVEMENTS (ie. streets, sidewalks, or sewers)

issuer assesses a tax only on the property that benefits from the improvement and uses the funds to pay principal and interest.

35
Q

New Housing AUthority Bonds

A

are for new housing projects (NOT necessarily newly issued bonds)

local housing authorities issue:

  • NEW HOUSING AUTHORITY BONDS (NHAs)/Public Housing Authority Bonds (PHAs to develop and improve low-income housing; these are backed by full faith and credit of US gov

bc of their federal backing, they’re considered the mOST SECURE OF ALL MUNI BONDS

PHAs are backed by the rental income from the housing; if rental income is not sufficient to service the debt, the fed gov makes up any shortfall.

Note: these bonds are NOT considered to be double-barreled; to be double-barreled, a bond MUST BE BACKED BY MORE THAN 1 MUNI REV SOURCE. Here, the 2nd backing is the fed gov

36
Q

***PHAs (or NHAs) are the ONLY…

A

muni issued backed in full by the US gov

also called Section 8 Bonds

37
Q

***moral obligation bonds

A

state or local-issued, or state or local-agency issued, bond

If rev or tax collections backing the bond are not sufficient to pay the debt service, the state legislature has the authority to appropriate funds to make payments. The potential backing by state rev tends to make the bonds MORE MARKETABLE, but the state’s obligation is not established by law. it’s a moral oblig only.

If the moral obligation bond goes into default, the only bondh can be repaid is through legislative apportionment. The issues legislature would have to apportion money to satisfy the debt but is not legally obligated to do so.

Remember, the issuer, has a mORAL BUT NOT LEGAL OBLIGATION TO SERVICE THE DEBT.

***ALL MORAL OBLIGATION BONDS ARE CONSIDERED REV BONDS.

38
Q

Muni notes

A

ST securities that generate funds for a muni that expects other rev soon;

usually have less than 12-month maturities, altho maturities may range from 3 months to 3 yrs

INTEREST AND PRINCIP PAID AT MATURITY (bc it’s ST); issued at discount

1) TANs (tax anticipation notes) - munis issue this to finance current ops in anticipation of future tax receipts; helps munis to even out CF between tax collection periods
2) RANs (rev anticipation notes) - offered periodically to fin current ops in anticipation of future revs from rev-producing projects/facilities
3) BANS (bond anticipation notes) - sold as interim financing that’ll eventually be converted to LT funding through sale of bonds
4) tax-exempt CP - often used in place of BANs and TANs for up to 270 days; maturities are most often 30,60, or 90 days tho
5) construction loan notes (CLNs) - issued t provide interim financing for the construction of housing projects
6) grant anticipation notes - issued with the expectation of receiving grant money from the fed gov

39
Q

Variable Rate Muni Securiites

A

MSRB calls these RESET SECURITIES bc interest rate is rest at certain intervals.

these are muni debt securities with interest rates that fluctuate based on current market interest rate changes

2 types of variable rate securities:
1) variable rate demand obligations (VRDOs) - floating rate obligations that typically have a nominal LT maturity of 20-30 yrs, but have an interest rate that’s reset periodically ; the reset can be daily, weekly, monthly, semiannually, or flexible; matching the interest rate to market conditions tend to keep the price of these relatively stable.

1 KEY FEATURE OF THIS SECURITY IS THE ABILITY OF THE INVESTOR TO DEMAND THE ISSUER REPURCHASE THE BONDS AT PAR. (basically, this is a put option where the investor “puts” the bond and receives the face amount plus any accrued interest; this feature is why VDROs are sometimes considered mm instruments)

2) auction rate securities (ARS) - debt securities that have int rates that are periodically reset through Dutch auctions, typically every 7, 14, 28, or 35 days. These are generally structured as bonds with LT maturities (20-30 yrs);
- munis and public authorities, student loan providers, and other institutional borrowers 1st began using these to raise funds in the 80s; these are marketed to retail investors who are seeking a cash-equiv investment that pays a HIGHER YIELD THAN MM MFs or CDs (altho ARS do NOT have the same liquidity as those)

40
Q

GOs Bond Analysis considers…

A

1) income
2) net worth
3) debt paying history
4) your outstanding debt

41
Q

income of munis

A

primary sources of muni income:

  • FOR STATE INCOME: income and sales taxes are major sources of state income
  • FOR COUNTIES/CITY INCOME: real property taxes are principal income source of counties, and schools districts are the largest source of city income
  • FOR CITY INCOME: includes fines, license fees, assessments, sales taxes, hotel taxes, city income taxes, utility taxes, and any city personal property taxes
42
Q

Wealth of Community

A

consider demographics data:

  • property values
  • retail sales per capita
  • local bank deposits
  • diversity of industry in its tax base
  • pop growth or decline
43
Q

Characteristics of the issuer (debt paying history)

A

quant analysis focuses on munis’ pop, property values, and per capita income. Qualitative analysis used to look at subject factors/community’s attitude toward debt and taxation

  • debt limits may be placed; state constitution or city charter can also limit the purposes for which a city may issue bonds
  • ad valorem taxes - property taxes are based on property’s assessed valuation
  • analyzing the official statement (OS) - muni bonds provide a form of prospectus (disclosure doc) known as an OFFICIAL STATEMENT
  • debt statement - analysis of GO debt, which includes full val of taxable property, value of property, assessm %
44
Q

to eval munis’ debt structure, analyst calculates…

A

total debt (sum of all bonds iseud by muni), subtracts SELF SUPPORTING DEBT

resulting in NET DIRECT DEBT (which includes GOs and ST notes)

45
Q

rev bond analysis

A

When assessing the quality of re bonds, an investor should consider:

  • economic justification - facility being built should be able to generate rev
  • competing facilities - facility should not be placed where better alternatives are easily available
  • sources of rev - sources should be dependable
  • call provisions - with callable bonds, the higher the call premium, the more attractive a bond is to an investor
  • flow of funds - rev generated must be sufficient to pay all of the facility’s op expenses and to meet debt service obligations

ECRCF

46
Q

Muni Bond Marketability Factors

A
  • rating
  • maturity (shorter the time until maturity, the more marketable the bond)
  • coupon (higher coupon = more marketable)
  • block size - typical block for a muni bond trade is $100K; trades that are in smaller amounts are NOT as marketable
  • call features - longer the call provisions, the more marketable the bond. That means noncallable bonds are the most marketable
  • dollar price - bonds with a lower dollar price are more marketable
  • refunding - (like refinancing; when interest rates fall, munis issue new bonds at lower rates; they then use the proceeds from NEW BONDS to pay off OLD, higher interest debt); REFUNDING INCREASES QUALITY OF BONDS
  • muni bond insurance

note: the more marketable the muni, the lower the profit to the muni dealer (less markups!)

47
Q

marketablity

A

ease/difficulty with which securities can be sold int he market

48
Q

2 types of refunding for munis

A
  1. active refunding (prerefeunding) - refinancing an existing muni bond issued BEFORE its maturity/call date by using money from sale of a new bond issue
    (proceeds of new bond issue are used to purchase special gov securities)
  2. current refunding - differs from advance refunding in that old bonds will be REDEEMED WITHIN 90 DAYS or less from date of issuance of refunding bonds.
49
Q

why do fair prices and commissions matter to munis?

A

marketability of muni bond plays a key role in determining fair prices and commissions

MSRB rule states that markups/markdowns/commissions must be be fair and reasonable and listed on the customer confirmation, taking into acct all characteristics of a trade, such as:

  • FMV of securities at trade time
  • total dollar amt of the transaction
  • any special difficulty in doing the trade, and
  • fact that the dealer is entitled to a profit
50
Q

reasonable compensation vs fair pricing

A

dealer could limits its profit on a transaction to a reasonable level and STILL violate this rule if dealer fails to consider market value!

51
Q

key muni bond calculation factors

A
  • nominal (coupon) yield
  • current yield
  • YTM
  • YTC
  • Accrued interest
52
Q

Accrued interest rules (recap)

A
  • corporates, agencies, munis: use 30-day months (360-day yr)
  • US Treasuries use actual day months (365 days)

when counting days:

  • go back and include the last interest payment date
  • go up to but NOT include settlement date
53
Q

trading flat meaning

A

when a debt security is trading flat, it means no accrued interest is included in the transaction

when the trade takes place so that it settles on an interest payment date, there is NO accrued interest bc the seller will receive a check from the issuer for the interest.

54
Q

Amortization vs Accretion

A

Amortization:

  • reduces cost basis
  • reduces reported interest income

Accretion

  • increases cost basis
  • increase reported interest income
55
Q

lifetime records include…

A
  • articles of incorporation (if the BD is a corp) or partnership agreement (if BD is a partnership)
  • minutes of board or partnership meetings
  • records of stock certificates (if BD is a corp)
56
Q

6 yr records include…

A
  • blotters (records of original entry)
  • general ledger (accting info such as income and expense and assets and liabilities)
  • customer ledgers (statements of the customer’s accts)
  • customer acct records (6 yrs after acct is closed)
  • customer complaints (only written complaints are considered and email is WRITTEN)
  • principal designation record (which individual supervises what)

MY SERIES 7 (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions