Chapter 11 - Municipal Debt Securities - Bond Types and Tax Treatment Flashcards
General Obligation (GO) bonds are backed by the issuer’s ________ and their ability to levy _______.
General Obligation (GO) bonds are backed by the issuer’s full faith and credit and their ability to 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 tax (e.g., school district bonds)
How is property tax calculated?
Assessed value
x
millage rate
What does 1 mill equal?
$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 _______.
Revenue bonds are backed 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 (with Operating and Maintenance first)
To calculate Debt Service Coverage Ratio, the formula used is:
(______ - ______) ÷ ________
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.
Debt service represents the total of all 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 dollars and tax dollars
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.
A special tax bond is a revenue bond backed by a specific tax (e.g., bonds issued for highway repair backed by gas tax)
A bond backed by a charge to benefiting property owners is called a _____________.
A bond backed by a charge to benefiting property owners is called a special assessment bond
(e.g., water/sewer system).
What bond would be issued to build a facility for a private company?
Industrial Development Revenue (IDR) bond
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.
Bonds subject to the AMT will trade with a higher yield.
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.
The maximum maturity of commercial paper is 270 days.
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 ___________.
MIG stands for Moody’s Investment Grade.
Standard & Poor’s three ratings for municipal notes are _____, _____, _____.
Standard & Poor’s three ratings for municipal notes are SP-1, SP-2, SP-3.
Municipal bond interest is exempt from ________ tax.
Municipal bond interest is exempt from federal tax.
What condition must exist for a municipal bond’s interest to be exempt at the state and local level?
Investors must buy the bond from the state in which they reside.
Who may issue bonds that offer interest that is triple tax-exempt?
Commonwealths, territories, and possessions (e.g., Puerto Rico)
The formula for taxable equivalent yield is:
__________ ÷ (________ - ________)
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 %)
