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Series 7 > Chapter 11 > Flashcards

Chapter 11 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

General Obligation (GO) bonds are backed by the issuer’s ________________________ and their ability to levy _______.

A

full faith and credit; levy taxes

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2
Q

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

A

Income, sales, or gasoline tax, but also licensing fees and fines.

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3
Q

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

A

Property taxes

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4
Q

How is property tax calculated?

A

Assessed value X millage rate

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5
Q

What does 1 mill equal?

A

.1%

$1.00 per thousand dollars of assessed value (.001 as a decimal)

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6
Q

When analyzing GO bonds, what are some important considerations?

A

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

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7
Q

Define overlapping debt.

A

Debt of a municipality that is shared with another political entity (e.g., school district debt)

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8
Q

True or False: An increase in unfunded pension liabilities is a negative sign of the municipality’s creditworthiness.

A

True

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9
Q

Revenue bonds are backed by ___________________ generated by ________________________.

A

specific revenue (user fees) generated by a project or facility

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10
Q

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

A

Operating and Maintenance fund

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11
Q

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

A

Debt Service

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12
Q

To calculate Debt Service Coverage Ratio, the formula used is: (________ - ________) ÷ ___________

A

(Gross Revenue - O/M Expenses) ÷ Debt Service

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13
Q

Debt service represents the total of all ____________ and ____________ payments.

A

principal and interest payments

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14
Q

What is level debt service?

A

Each year’s debt service payments remaining generally equal.

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15
Q

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

A

revenue and taxes

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16
Q

True or False: If revenue falls short, payments on moral obligation bonds only begin with legislative approval.

A

True

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17
Q

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

A

Special tax bond (bonds for highway repair backed by gas tax)

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18
Q

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

A

special assessment bond (water/sewer)

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19
Q

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

A

Industrial Development Revenue (IDR)

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20
Q

True or False: The credit rating of an IDR is based on the credit of the municipality.

A

False. The rating is based on the corporation making the lease payments.

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21
Q

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

A

Private Activity Bonds

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22
Q

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

A

higher

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23
Q

What is a Bond Anticipation Note (BAN)?

A

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

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24
Q

What is a Revenue Anticipation Note (RAN)?

A

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

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25
Q

What is a Tax Anticipation Note (TAN)?

A

Municipal note issued in anticipation of future real estate taxes

26
Q

What is a Grant Anticipation Note (GAN)?

A

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

27
Q

What is a Construction Loan Note (CLN)?

A

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

28
Q

What are some examples of tax-free money-market instruments?

A

Municipal notes and tax-exempt commercial paper

29
Q

The maximum maturity of commercial paper is ____ days.

A

270

30
Q

How often will VRDOs adjust their interest rate?

A

At specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.

31
Q

MIG stands for ___________________________.

A

Moody’s Investment Grade

32
Q

Standard & Poor’s three ratings for municipal notes are ______, ______, ______.

A

SP-1, SP-2, SP-3

33
Q

Municipal bond interest is exempt from __________ tax.

A

Federal

34
Q

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

A

bond bought from state they live in

35
Q

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

A

commonwealths, territories and possessions

36
Q

The formula for taxable equivalent yield is: __________ ÷ (________ - ________)

A

Tax-Free Yield ÷ (100% - Tax Bracket %)

37
Q

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

A

The formula for net (after-tax) yield is: Taxable Yield x (100% - Tax Bracket %)

38
Q

Accrued interest on municipal bonds is calculated using ____ days in the month and _____ days in the year.

A

30 days/month, 360 days/year

39
Q

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

A

gain is taxed as ordinary income

40
Q

What is a municipal OID?

A

Original Issue Discount bond

41
Q

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

A

None

42
Q

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

A

accretion

43
Q

What is the IRS method for accreting the basis of a bond?

A

Constant yield or constant interest method

44
Q

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

A

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

45
Q

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

A

Accreted value

46
Q

The process of adjusting the basis of a premium bond down to par over its life is called _______________.

A

amortization

47
Q

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

A

tax exempt

48
Q

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

A

amortized down to par, so no gain/loss. No tax consequences

49
Q

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

A

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

50
Q

How is interest on municipal bonds treated for tax purposes?

A

Federally tax-exempt, but may be subject to state and local tax

51
Q

A decision of the ___________________ created the tax exemptions for government and municipal bonds.

A

U.S. Supreme Court

52
Q

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

A

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

53
Q

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

A

3:1

(gross revenue-operating)/debt service
(9-3)/2

54
Q

Mack, in the 35% tax bracket, is earning 5.4% on a tax-free municipal bond. What is his taxable equivalent yield?

A

The formula is: Tax-Free Yield ÷ (100% - Tax Bracket %). 5.4% ÷ 65% = 8.3%

55
Q

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

A

Maintenance and Operation Covenant

56
Q

True or False: The Flow of Funds covenant on a revenue bond describes the priority for distributing project revenue.

A

True

57
Q

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

A

The formula is: Taxable Yield x (100% - Tax Bracket %). 8.5 x 72% = 6.12%.

58
Q

What are Auction Rate Securities (ARS)?

A

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

59
Q

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

A

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

60
Q

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

A

True

61
Q

Moody’s rates municipal notes using ______, ______, ______, ______.

A

MIG1, MIG2, MIG3, SG.

Series 7 (25 decks)

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