Ch. 7 S7

Question 1

T/F: An increase in unfunded pension liabilities is a negative sign of the municipality’s creditworthiness.

Answer 1

T

Question 2

Bonds subject to the AMT will trade with a ___________ yield.

Answer 2

Higher

Question 3

What is the tax consequence if a municipal Original Issue Discount (OID) bond is held to maturity?

Answer 3

Since the basis must be accreted up to par, there is not capital gain or loss when an OID is held to maturity

Question 4

$9 million gross revenue, $3 million oper. /maint. expense, and $2 million debt service. Debt service coverage ratio?

Answer 4

($9 million - $3million) ➗ $2 million = 3:1 coverage

Question 5

What is a Revenue Anticipation Note (RAN)?

Answer 5

Municipal note that will eventually be paid from future federal or state subsidies.

Question 6

Municipal bond interest is exempt from _____________ tax.

Answer 6

Federal

Question 7

Grandparents contributing to a grandchild’s 529 plan may give how much money and still avoid gift tax consequences?

Answer 7

Front-loading of five years of contributions is allowed; therefore, each could contribute $80,000 for a total of $160,000

Question 8

General Obligations (GO) bonds are backed by the issuers ______________ and their ability to levy _________.

Answer 8

Full faith and credit ; taxes

Question 9

How does the Dutch Auction set the interest rate on Auction Rate Securities?

Answer 9

It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).

Question 10

_______________ bonds would most likely require voter approval.

Answer 10

General obligation

Question 11

How is the phantom interest on an OID treated for tax purposes?

Answer 11

It is considered interest income on a municipal bond, and therefore, tax exempt

Question 12

What types of municipal bonds are most likely subject to the Alternative Minimum Tax?

Answer 12

Private Activity Bonds

Question 13

By what types of taxes are state general obligation bonds backed?

Answer 13

Income, sales, gas tax and licensing fees and fines.

Question 14

What are Auction Rate Securities (ARS)?

Answer 14

Long term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction.

Question 15

Mack, in the 35% tax bracket, is earning 4.5% on a tax free municipal bond. What is his taxable equivalent yield?

Answer 15

The formula is: tax free yield ➗ (100- tax bracket %) 5.4% ➗ 65% =8.3%

Question 16

MIG stands for _________________.

Answer 16

Moodys Investment Grade

Question 17

What is a major advantage to investing in a bond issued by the Commonwealth of Puerto Rico?

Answer 17

Triple-tax-exempt interest

Question 18

______ Plans are college savings plans with high contribution limits set by the state sponsor.

Answer 18

529

Question 19

For a municipal bond to be considered good delivery, is a Legal Opinion mandatory?

Answer 19

Yes, a Legal Opinion must be imprinted or attached (unless identified as ex-legal)

Question 20

T/F: The Flow of Funds covenant on a revenue bond describes the priority for distributing project revenue.

Answer 20

T

Question 21

T/F: The interest rate reset periods on Auction Rate Securities range from 7, to 28, or 35 days.

Answer 21

T

Question 22

How much can be contributed to a 529 plan and avoid gift tax?

Answer 22

A donor may give up to $16,000 per year and avoid the gift tax

Question 23

A _______________ is a revenue bond backed by one specific tax.

Answer 23

Special tax bond

Question 24

Describe the tax treatment of contributions made to a 529 plan.

Answer 24

They are after tax contributions that may possibly grow tax free.

Question 25

The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called ____________.

Answer 25

Accretion

Question 26

T/F: 529 plans allow for a five year front end contribution of $80,000, which avoids gift tax.

Answer 26

T

Question 27

What is the net yield for an investment in the 28% tax bracket who owns an 8.5% corporate bonds?

Answer 27

The formal is: taxable yield x (100- tax bracket %). 8.5% x 72% = 6.12%

Question 28

Assuming a net revenue pledge bond, what is the first priority according to the flow of funds?

Answer 28

Operating and maintenance fund

Question 29

What bond would be issued to build a facility for a private company?

Answer 29

Industrial Development Revenue (IDR) bond

Question 30

Who may issue bonds that offer interest that is triple tax-exempt?

Answer 30

Commonwealths, territories, and possessions (puerto Rico)

Question 31

What two sources are used to pay debt service on a double barreled bond?

Answer 31

Revenue dollars and tax dollars.

Question 32

Define overlapping debt.

Answer 32

Debt of municipality that is shared with another political entity (school district debt)

Question 33

What condition must exist for a municipal bonds interest to be exempt at the state and local level?

Answer 33

Investors must buy the bond from the state in which they reside.

Question 34

S&Ps four ratings for municipal notes are _____, ______, ______, _______.

Answer 34

SP-1+, SP-1, SP-2, SP-3

Question 35

Revenue bonds are backed by ____________ generated by _____________.

Answer 35

Specific revenue (user fees) ; a project or facility

Question 36

What is a Construction Loan Note (CLN)?

Answer 36

Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing

Question 37

What is a Bond Anticipation Note (BAN)?

Answer 37

Municipal note issued for capital project that will eventually be paid from proceeds of a long term bond.

Question 38

When analyzing GO bonds, what are some important considerations?

Answer 38

Property values, per capita income and debt, population, current debt, tax collection, unfunded pension liabilities

Question 39

What’s stated in a municipal indenture (bond resolution)?

Answer 39

Issuers responsibilities, bond holders rights, and the different covenants (pledges) made to protect bond holders

Question 40

The formula for net (after tax) yield is: ___________ x (_________ - __________)

Answer 40

Taxable yield x (100% - tax bracket %)

Question 41

In what covenant does the issuer pledge to keep the project in good working order?

Answer 41

Maintenance and operation covenant

Question 42

What is the tax consequence if a municipal bond is purchased at a premium and held to maturity?

Answer 42

Since the basis must be amortized down to par, there is no capital gain or loss when a premium bond is held to maturity

Question 43

The formula for taxable equivalent yield is: ___________ ➗ (__________ - __________)

Answer 43

Tax free yield ➗ (100% - tax bracket %)

Question 44

What is the tax consequences is a municipal Original Issue Discount (OID) bond is sold prior to maturity?

Answer 44

A capital gain or loss determined by the difference between the adjusted basis and the proceeds on the sale

Question 45

Which bond would most likely require a feasibility study to be issued?

Answer 45

Revenue Bond

Question 46

What is a municipal OID?

Answer 46

An Original Issue Discount bond

Question 47

What are some examples of tax free money market instruments?

Answer 47

Municipal notes and tax exempt commercial paper

Question 48

To calculate Debt Service Coverage Ratio, the formula used is: (_________ - _________) ➗ _____________.

Answer 48

(Gross revenue - O/M expenses) ➗ debt service

Question 49

A muni bond is bought at a secondary market discount and sold for a gain before maturity. What is the tax consequence?

Answer 49

The gain is taxable as ordinary income up to the accreted value, and a capital gain for anything above that

Question 50

How often will VRDOs adjust their interest rate?

Answer 50

At specified intervals such as daily, weekly, or monthly. VRDOs allow investors to put back to the issuer.

Question 51

How is interest on municipal bonds treated for tax purposes?

Answer 51

Federally tax exempt, but my be subject to state and local tax

Question 52

Interest paid on bonds issued by US Territories or possessions is ___________.

Answer 52

Triple tax exempt

Question 53

An OID is sold prior to maturity. Is the capital gain (or loss) based on the original cost basis or accreted value?

Answer 53

The accreted value of the bond

Question 54

Assuming a net revenue pledge bond, what is the second priority according to the flow of funds?

Answer 54

Debt Service (with operating and maintenance first)

Question 55

What is the tax consequence of a municipal bond is purchased at a premium and sold prior to maturity?

Answer 55

A capital gain or loss is determined by the difference between the adjusted basis and the proceeds of the sale.

Question 56

A bond backed by a charge to benefiting property owners is called a ___________.

Answer 56

Special assessment bond (water/sewer systems)

Question 57

Moodys rates municipal notes using ____, _____, _______, ________.

Answer 57

MIG1, MIG2, MIG3, SG

Question 58

What is a Grant Anticipation Note (GAN)?

Answer 58

Municipal note issued in anticipation of receiving government funding in the form of a grant.

Question 59

T/F: The credit rating of an IDR is based on the credit of the municipality.

Answer 59

F; the rating is based on the corporation making the lease payments

Question 60

Local general obligation bonds are backed by what type of tax?

Answer 60

Property tax (school district bonds)

Question 61

What is the tax consequence if a municipal bond is purchased at a secondary market discount and held to maturity?

Answer 61

The gain is taxed as ordinary income.

Question 62

What is a Tax Anticipation Note (TAN)?

Answer 62

Municipal note issued in anticipation of future real estate taxes

Question 63

In a bond swap (bond sold at a loss and another purchased), what features need to be changed to not trigger a wash sale?

Answer 63

Change the issuer, or the coupon, or the maturity.