Chapter 11 Flashcards
General Obligation (GO) bonds are backed by the issuer’s ________________________ and their ability to levy _______.
full faith and credit; levy taxes
By what types of taxes are state general obligation bonds backed?
Income, sales, or gasoline tax, but also licensing fees and fines.
Local general obligation bonds are backed by what type of tax?
Property taxes
How is property tax calculated?
Assessed value X millage rate
What does 1 mill equal?
.1%
$1.00 per thousand dollars of assessed value (.001 as a decimal)
When analyzing GO bonds, what are some important considerations?
Property values, per capita income and debt, population, current debt, tax collection, unfunded pension liabilities
Define overlapping debt.
Debt of a municipality that is shared with another political entity (e.g., school district debt)
True or False: An increase in unfunded pension liabilities is a negative sign of the municipality’s creditworthiness.
True
Revenue bonds are backed by ___________________ generated by ________________________.
specific revenue (user fees) generated by a project or facility
Assuming a net revenue pledge bond, what is the first priority according to the flow of funds?
Operating and Maintenance fund
Assuming a net revenue pledge bond, what is the second priority according to the flow of funds?
Debt Service
To calculate Debt Service Coverage Ratio, the formula used is: (________ - ________) ÷ ___________
(Gross Revenue - O/M Expenses) ÷ Debt Service
Debt service represents the total of all ____________ and ____________ payments.
principal and interest payments
What is level debt service?
Each year’s debt service payments remaining generally equal.
What two sources are used to pay debt service on a double-barreled bond?
revenue and taxes
True or False: If revenue falls short, payments on moral obligation bonds only begin with legislative approval.
True
A __________________ is a revenue bond backed by one specific tax.
Special tax bond (bonds for highway repair backed by gas tax)
A bond backed by a charge to benefiting property owners is called a __________________________.
special assessment bond (water/sewer)
What bond would be issued to build a facility for a private company?
Industrial Development Revenue (IDR)
True or False: The credit rating of an IDR is based on the credit of the municipality.
False. The rating is based on the corporation making the lease payments.
What types of municipal bonds are most likely subject to the Alternative Minimum Tax?
Private Activity Bonds
Bonds subject to the AMT will trade with a _________ yield.
higher
What is a Bond Anticipation Note (BAN)?
Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond
What is a Revenue Anticipation Note (RAN)?
Municipal note that will eventually be paid from future federal or state subsidies
What is a Tax Anticipation Note (TAN)?
Municipal note issued in anticipation of future real estate taxes
What is a Grant Anticipation Note (GAN)?
Municipal note issued in anticipation of receiving government funding in the form of a grant
What is a Construction Loan Note (CLN)?
Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing
What are some examples of tax-free money-market instruments?
Municipal notes and tax-exempt commercial paper
The maximum maturity of commercial paper is ____ days.
270
How often will VRDOs adjust their interest rate?
At specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.
MIG stands for ___________________________.
Moody’s Investment Grade
Standard & Poor’s three ratings for municipal notes are ______, ______, ______.
SP-1, SP-2, SP-3
Municipal bond interest is exempt from __________ tax.
Federal
What condition must exist for a municipal bond’s interest to be exempt at the state and local level?
bond bought from state they live in
Who may issue bonds that offer interest that is triple tax-exempt?
commonwealths, territories and possessions
The formula for taxable equivalent yield is: __________ ÷ (________ - ________)
Tax-Free Yield ÷ (100% - Tax Bracket %)
The formula for net (after-tax) yield is: __________ x (________- ________)
The formula for net (after-tax) yield is: Taxable Yield x (100% - Tax Bracket %)
Accrued interest on municipal bonds is calculated using ____ days in the month and _____ days in the year.
30 days/month, 360 days/year
What is the tax consequence if a municipal bond is purchased at a secondary market discount and held to maturity?
gain is taxed as ordinary income
What is a municipal OID?
Original Issue Discount bond
What is the tax consequence if a municipal Original Issue Discount (OID) bond is held to maturity?
None
The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called ____________.
accretion
What is the IRS method for accreting the basis of a bond?
Constant yield or constant interest method
What is the tax consequence if a municipal Original Issue Discount (OID) bond is sold prior to maturity?
A capital gain or loss determined by the difference between the adjusted basis and the proceeds on the sale
An OID is sold prior to maturity. Is the capital gain (or loss) based on the original cost basis or accreted value?
Accreted value
The process of adjusting the basis of a premium bond down to par over its life is called _______________.
amortization
How is the phantom interest on an OID treated for tax purposes?
tax exempt
What is the tax consequence if a municipal bond is purchased at a premium and held to maturity?
amortized down to par, so no gain/loss. No tax consequences
What is the tax consequence if a municipal bond is purchased at a premium and sold prior to maturity?
A capital gain or loss determined by the difference between the adjusted basis and the proceeds of the sale
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
A decision of the ___________________ created the tax exemptions for government and municipal bonds.
U.S. Supreme Court
A muni. bond is bought at a secondary market discount and sold for a gain before maturity. What is the tax consequence?
The gain is taxable as ordinary income up to the accreted value, and a capital gain for any amount above that.
$9 million gross revenue, $3 million oper./maint. expenses, and $2 million debt service. Debt service coverage ratio?
3:1
(gross revenue-operating)/debt service
(9-3)/2
Mack, in the 35% tax bracket, is earning 5.4% on a tax-free municipal bond. What is his taxable equivalent yield?
The formula is: Tax-Free Yield ÷ (100% - Tax Bracket %). 5.4% ÷ 65% = 8.3%
In what covenant does the issuer pledge to keep the project in good working order?
Maintenance and Operation Covenant
True or False: The Flow of Funds covenant on a revenue bond describes the priority for distributing project revenue.
True
What is the net yield for an investor in the 28% tax bracket who owns an 8.5% corporate bond?
The formula is: Taxable Yield x (100% - Tax Bracket %). 8.5 x 72% = 6.12%.
What are Auction Rate Securities (ARS)?
Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction
How does the Dutch Auction set the interest rate on Auction Rate Securities?
It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).
True or False: The interest rate reset periods on Auction Rate Securities range from 7, to 28, or 35 days.
True
Moody’s rates municipal notes using ______, ______, ______, ______.
MIG1, MIG2, MIG3, SG.
