Chapter 11 - Municipal Debt Securities - Bond Types and Tax Treatment

Question 1

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

Answer 1

General Obligation (GO) bonds are backed by the issuer’s full faith and credit and their ability to levy taxes.

Question 2

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

Answer 2

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

Question 3

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

Answer 3

Property tax (e.g., school district bonds)

Question 4

How is property tax calculated?

Answer 4

Assessed value

x

millage rate

Question 5

What does 1 mill equal?

Answer 5

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

Question 6

When analyzing GO bonds, what are some important considerations?

Answer 6

• Property values
• Per capita income and debt
• Population
• Current debt
• Tax collection
• Unfunded pension liabilities

Question 7

Define overlapping debt.

Answer 7

Debt of a municipality that is shared with another political entity

(e.g., school district debt)

Question 8

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

Answer 8

True

Question 9

Revenue bonds are backed by _________ generated by _______.

Answer 9

Revenue bonds are backed by specific revenue (user fees) generated by a project or facility.

Question 10

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

Answer 10

Operating and Maintenance Fund

Question 11

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

Answer 11

Debt Service (with Operating and Maintenance first)

Question 12

To calculate Debt Service Coverage Ratio, the formula used is:

(______ - ______) ÷ ________

Answer 12

To calculate Debt Service Coverage Ratio, the formula used is:

(Gross Revenue - O/M Expenses)

÷

Debt Service

Question 13

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

Answer 13

Debt service represents the total of all principal and interest payments.

Question 14

What is level debt service?

Answer 14

Each year’s debt service payments remaining generally equal.

Question 15

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

Answer 15

Revenue dollars and tax dollars

Question 16

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

Answer 16

True

Question 17

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

Answer 17

A special tax bond is a revenue bond backed by a specific tax (e.g., bonds issued for highway repair backed by gas tax)

Question 18

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

Answer 18

A bond backed by a charge to benefiting property owners is called a special assessment bond

(e.g., water/sewer system).

Question 19

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

Answer 19

Industrial Development Revenue (IDR) bond

Question 20

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

Answer 20

False.

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

Question 21

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

Answer 21

Private Activity bonds

Question 22

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

Answer 22

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

Question 23

What is a Bond Anticipation Note (BAN)?

Answer 23

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

Question 24

What is a Revenue Anticipation Note (RAN)?

Answer 24

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

Question 25

What is a Tax Anticipation Note (TAN)?

Answer 25

Municipal note issued in anticipation of future real estate taxes

Question 26

What is a Grant Anticipation Note (GAN)?

Answer 26

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

Question 27

What is a Construction Loan Note (CLN)?

Answer 27

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

Question 28

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

Answer 28

Municipal notes and tax-exempt commercial paper

Question 29

The maximum maturity of commercial paper is ____ days.

Answer 29

The maximum maturity of commercial paper is 270 days.

Question 30

How often will VRDOs adjust their interest rate?

Answer 30

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

Question 31

MIG stands for ___________.

Answer 31

MIG stands for Moody’s Investment Grade.

Question 32

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

Answer 32

Standard & Poor’s three ratings for municipal notes are SP-1, SP-2, SP-3.

Question 33

Municipal bond interest is exempt from ________ tax.

Answer 33

Municipal bond interest is exempt from federal tax.

Question 34

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

Answer 34

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

Question 35

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

Answer 35

Commonwealths, territories, and possessions (e.g., Puerto Rico)

Question 36

The formula for taxable equivalent yield is:

__________ ÷ (________ - ________)

Answer 36

The formula for taxable equivalent yield is:

Tax-Free Yield

÷

(100% - Tax Bracket %)

Question 37

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

______ x (_____- _____)

Answer 37

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

Taxable Yield x (100% - Tax Bracket %)