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Series 7 > Chapter 15 - Municipal Bond taxation, underwriting, and the secondary market AND Chapter 16 - Municipal Bond Rules and Regulations > Flashcards

Chapter 15 - Municipal Bond taxation, underwriting, and the secondary market AND Chapter 16 - Municipal Bond Rules and Regulations Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Interest on municipal bonds

A

Paid semi annually

Most are exempt from federal income tax due to the doctrine of reciprocal immunity applied by the supreme court

Most states exempt municipal bond interest from income tax within the state of issue

Common wealth of Puerto Rico bonds are exempt from all federal, state, and local taxes (applies to all territories of the united states)

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2
Q

Corporate Equivalent Yield

A

Municipal Yield/ (100%-investors tax rate) = taxable equivalent yield

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3
Q

Current yield on municipal bond

A

annual interest/ market price

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4
Q

Bonds sold at a premium and taking the loss from par

A

Corporate bonds- On the date of maturity when you receive the par value back you can take the full loss of the bond you purchased at a premium

Municipal bonds- You must amortize the loss from purchasing the bond at a premium each year you hold the bond

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5
Q

Municipal Bonds and original issue discount

A

If the investor buys a bond at a discount in an original offering they treat the discount as part of the interest income, not capital gains

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6
Q

Municipal Bonds and secondary market discount

A

When bonds are bought at a discount on the secondary market they are taxed at ordinary income when they are sold

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7
Q

Municipal bonds at a premium or discount and volatilities

A

Bonds trading at a discount are more volatile (they are more sensitive to interest rate changes) than bonds trading at a premium

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8
Q

Municipal bond swaps

A

The exchange of one bond for another. Usually occur at the end of the end when investors want to realize a capital loss while keeping their money in municipal bonds

Also:
Upgrade to higher rated bonds
Extend or shorten bond maturity
increase income or yield

accrued interest is NEVER a reason to do a municipal bond swap

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9
Q

Large Buyers of municipal bonds include

A

High tax bracket individuals
Commercial Banks
Insurance companies

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10
Q

These groups do not typically invest in municipal bonds

A

Charitable organizations
IRAs
pension funds

these all already have tax exempt status

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11
Q

The secondary market for municipal bonds

A

Is thin

Most bonds are bought at par and held until maturity

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12
Q

Blue List did and did not contain

A

Did: Amount of bond for sale
Name of the issuing authority
Coupon Rate
Maturity Date
Yield
Name of dealer offering the bond
Purpose of the bond

DID NOT:
The bonds quality rating

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13
Q

Placement Ratio

A

Measures the percentage of new issues that have been sold compared to those available

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14
Q

30 day visible supply

A

the amount of new issues coming to the market in the next 30 days

This is then broken down into competitive and negotiated bonds to be sold

Municipal notes are not included in the 30 day supply

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15
Q

Bond Buyer Index

A

Is made up on 20 GO bonds each with 20 year maturities

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16
Q

Bond Buyer Revenue Bond Index

A

the average of 25 revenue bonds each with 30 year maturities

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17
Q

Municipal market trends can be determined by using…

A

The 30 day visible supply
The bond buyers index
The blue list

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18
Q

Under writer for municipal bonds are chosen through either

A

Negotiated bidding- Revenue bond

Competitive bidding - GO bond issuer

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19
Q

Underwriters and Selling Syndicate members must agree on new issue being either

A

Eastern account agreement (most municipal bonds are eastern) - You are responsible for your percentage of the overall deal and also your percentage of anyone else’s left overs that they were unable to sell

Western account agreement- you take on your agreed upon percentage of the deal and that is all you are responsible for

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20
Q

Municipal Bond underwriters are either

A

Commerical banks or broker dealers who are members of FINRA or MSRB (municipal securities rulemaking board

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21
Q

Forming an underwriters agreement with negotiated bidding

A

Terms and interest rates which will be offered are negotiated directly between the issuer and the underwriter

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22
Q

Forming an Bid form with competitive bidding

A

The bond is awarded to the group that offers the lowest net interest cost

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23
Q

Net interest cost (NIC)

A

The Amount of interest that the municipality will end up paying on the bond issue

Any premium over par that is received when the bond is sold is subtracted from the interest cost to the issuer

Issuers also want to know the “True interest cost” since that considers time value of money but NIC does not

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24
Q

What must be included in Municipal bond notice of sale (and what does not)

A

Include- Date and time bid are due
The detail on the bond issue
redemption features
Interest or coupon rate
paying agent
purpose of the bond
Bond attorney that will be giving opinion
Where the bonds are to be delivered
CUSIP number
Maturity date and call features
Amount of good faith deposit required by bidders
The right to reject any and all bids

NOT-The bond rating
guarantee of debt servicing
offering yield
Bond Years
Record of tax collection
legal opinion

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25
Q

Bid Form

A

A document that is included with the notice of sale that is sent to the bidder

when executed the bond form becomes the contract

Includes coupon rate
maturities and signature of the submitting dealer

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26
Q

Competitive bidding roles

A

Issuer - determines the maturity

Underwriter - determines the spread, yield to maturity, and net interest cost

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27
Q

Managing underwriters in a competitive bid, before submitting a bid will

A

reach out to each member with a syndicate letter in which the agreement between the underwriting manager and the syndicate is described

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28
Q

Syndicate letter includes

A

The duration of the underwriting
Member’s participation or commitment
statement saying this is not a legal partnership
a vote of the syndicated members will determine the bid and offering price
A carte blanche which gives manager ability to act “ with customary authority and discretion
Priority or allocation schedule
Syndicate may violate the syndicate letter but only if it is to the benefit of the entire syndicate account

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29
Q

Allocation Order

A

Pre-sale orders
Group net account or syndicate group accounts
Designated orders
Member orders at the takedown

30
Q

The take down

A

The syndicate member agrees to purchase the bond from the underwriter at the offering price less a discount. This discount is known as the take down and represents what the syndicate member will earn from the sale

31
Q

Odd First coupon

A

Some times the first coupon can be longer or shorter than the standard 6 month coupon rate

Short coupon is less then 6 months

Long coupon is more then 6 months

32
Q

Prospectus in municipal bonds

A

Municipal bonds do not call their disclosure document a prospectus, they call it an Official Statement (OS)

33
Q

Official Statement

A

Provided by the issuer
Not required
Contained the most detailed financial information on the municipal bond
If it is provided it must be provided to all purchasers and to broker dealers upon request

34
Q

If there is a preliminary OS but not an official OS it must be

A

Provided to a customer at the time of purchase
Then the final statement must be sent when it is available

35
Q

Official statement includes

A

The purpose of the bond issue
redemption provisions
a description of the issues

NEVER includes a taxable equivalent yield

36
Q

An entire sale of a new issue of municipal bonds to a single individual or group of accredited investors is referred to as

A

a private placement

37
Q

Accumulation account

A

An account established by the sponsor of a UIT to hold bonds which will be put into the portfolio when the UTI is formally created

Accumulation account orders must be designated as such at the time of order

38
Q

Earnings or debt service coverage

A

This reflects the number of times by which the revenues for a period exceed the debt service payable in that period

Revenue / debt service

39
Q

Dated Date

A

The date for a new issue from which interest is accrued

40
Q

Municipal Bond: The spread

A

Difference between syndicate cost, average offering price, and the proceeds paid to issuer

41
Q

When talking about yield with Muni Bonds we are talking about…

A

Yield to maturity, also called the basis

42
Q

Nominal yield, current yield and yield to maturity are all the same if…

A

the bond is trading at par

43
Q

Secondary market for muni bonds are typically traded

A

On a principal basis, trading with the firms own inventory of bonds as opposed to purchasing between two individuals

Make money thru a mark up or mark down, not through commissions

44
Q

What to consider when pricing a bond on the secondary market

A

The prevailing market price (not the price they paid originally for it)
The aggregate dollar amount of the transaction
The expenses of the transaction

45
Q

A muni bond quote may be

A

Firm-
Subject to prior purchase
Subject to a subsequent price change
Nominal
Affected by interest rate moves, supply and by the market price of similar bonds

46
Q

Bank Qualified Municipal Bonds

A

If the bank purchases an entire bond issue that is less then $10 million par value for its won portfolio then it is called a BQMB. The bank can take an 80% ta write off on the interest for the money borrowed to purchase these bonds

47
Q

Market price of municipal bonds can change based on

A

Tax legislation
credit ratings
market conditions

48
Q

Bond marketability factors

A

Rating and quality
Maturity - Shorter maturities are more liquid
Call features
Coupon
Block Size - $100,000 round lot. less then that is less marketable
Dollar price- all else being equal bonds at par are more marketable
Issuers name
Trading flat - have unpaid interest
Sinking funds

49
Q

The blue list total is…

A

The par value of municipal securities offered for sale in the blue list

50
Q

Visible Supply is

A

new offerings expected to come to market it the next 30 days

51
Q

Municipal Securities Rulemaking Board (MSRB)

A

Created in 1975 to set rules to regulated all FIRMS in transacting in municipal securities

52
Q

MSRB rules apply to

A

Municipal securities broker/Dealer
Bank municipal dealer department
Financial Consultants

does NOT regulate the issuer (municipality)

53
Q

MSRB rules are subject to

A

SEC approval

54
Q

MSRB rules are enforced by

A

Mostly SEC and FINRA( formally NASD)

Governors of the federal reserve, Comptroller of Currency, and Federal Deposit Insurance Corporation all also enforce MSRB rules

MSRB rules are not enforced by NYSE or U.S. Treasury

55
Q

Gifts permitted under MSRB rules

A

Maximum of $100 normally

in additional:
Reminder advertising (max value $40)
Tickets to a sporting event $100
A restaurant bill for the broker and customer ($130)
Accommodations for a customer at an economic conference ($180)

56
Q

When opening an account with another dealer, other then your employer

A

The new dealer must send notice to your employing dealer
Must act in full compliance with Dealer A written instructions
Submit Duplicate copies of confirmations to Dealer A

Prior approval from dealer A is not required to open and account or execute orders

57
Q

All advertising and sales literature must be approved by..

A

a principal

In writing

Prior to first use

But they do not have to be files with the MSRB prior to first use

Preliminary and official statements are not sales advertising, they are considered to be disclosure documents

58
Q

Reciprocal dealing

A

This is when a broker dealer solicits a transaction in municipal securities of a UIT in return for shares or units

This is NOT allowed

59
Q

When opening a discretionary account for municipal securities, at or before settlement you must obtain

A

Written authorization from the client

a principals approval of the account and the initial trade

60
Q

Trade reporting

A

Trades must be reported within 15 minutes of a trade taking place

61
Q

MSRB arbitration rules

A

Mirror FINRA arbitration rules

62
Q

Contribution limits for political candidates under MSRB

A

Max $250 per election, and you must be eligible to vote in that election

If violated you, and your firm, can not do business with that issuer for 2 years

63
Q

Settlement for municipal securities is

A

Regular way - T+2
Cash trades are same day
“When, as, and if issued” trades settle on a date agreed upon by both parties but not earlier then two days after the final confirmation

Between firms they typically use “clearing house funds” and are settled in 1 day

64
Q

Units for Bearer bonds

A

$1,000 minimum, $5,000 usual

65
Q

Units for Registered bonds

A

$1,000 in multiples up to $100,000

66
Q

What must be unreadable for a mutilated certificate

A

Name of issuer
Par value
Signature
Coupon Rate
Maturity Date
Seal of the issuer
Bond or Note number

Can not be rejected for missing CUSIP number

67
Q

Good delivery of a bond requires

A

Trade to settle in T+2
Bond is not being called or has been designated as being called
Legal opinion is accompanying bond if not sold ex-legal
Bonds in demonizations of $1,000 or $5,000
All identification items are readable on the certificate

68
Q

If there is a bond that is flat (has missed interest payments) and the bond is sold

A

The purchaser gets the bond coupons where the interest has yet to be paid

69
Q

Expenses to ship a bond are paid by

A

the seller (postage, insurance packaging etc)

70
Q

Information not needed on a bond confirmation

A

Quality rating
Debt service coverage
Commission per bond (total commission will be shown)
Identity of the paying agent

71
Q

At of before completion of a transaction of municipal securities the agent must determine

A

The financial status
the tax status
investment objectives
any previous investment experience

Series 7 (20 decks)

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