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Series 7- Passed with 83% > Chapter 3- Municipal Securities 30-40 questions > Flashcards

Chapter 3- Municipal Securities 30-40 questions Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Municipal Bonds

A

Securities issued either by state or local government or by US teritiories, authorities and special districts

Purpose of public works and construction projects

Second in safety of principal only to Us gov

Generally pay lower interest due to tax adv.

Should take into account when evaluating against a corporation

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2
Q

Municipal bond taxation

A

Interest is Not generally taxed by the federal government (origin from Doctrine of Reciprocal Immunity which states level of gov can tax only interest of own issues)

US territories are not taxed at any level

Capital gains are still taxed, may not be subject to tax if municipal is in state

Buying low and selling high results in capital gains

If living in a different state then the bond may be taxed

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3
Q

Issues of Municipals

A

Territorial possessions of the US

State Government

Legally constituted tax authorities (counties, agencies etc)

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4
Q

Maturity Structures of Municipals

A

Maturity ranges from less than a year to more than 30

3 different types of maturity:
1. Term Maturity- All matures at single date, quoted by price, called dollar bond

  1. Serial Maturity- Mature on different dates to a predetermined schedule. Quoted based on yield to maturity. Most common
  2. Balloon Maturity- Pay partial amount, but largest portion is paid off at maturity. Type of serial maturity
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5
Q

General Obligation Bonds

A

Municipal bonds issued for capital improvements that benefit entire community

Paid by taxes collected by municipal issuer such as property tax (ad valorem), license fees

Known as full faith and credit issues

Municipalities may have debt limits to protect taxpayers

Voter approval is required if wanting to go over limit

Property taxes are usually limited to a certain percentage and expressed in mills

One Mill equals $1 per 1000 or .001

Limited tax GO- secured by specific tax, more risk associated

Overlapping debt (coterminous debt)- several different municipal authorities taxing same person. Only occurs with property tax

Double Barreled Bonds- Revenue bond that also has the backing of taxation

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6
Q

Revenue Bonds

A

Used to finance municipal facility that generates sufficient income

Additional Bonds test may be issued before a subsequent issue with an equal Lien can be completed

Feasibility study on economic feasibility and need is issued before project is taken on

Interest and principal paid from: Utilities, housing, transportation, education, health, industrial and sports

Not backed by taxes

A trust indenture (referred to on face) protects bondholders by making sure the facility is in compliance… usually issued but not required

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7
Q

Common bond covenants

A

Rate covenant- promise to maintain rates sufficient to pay expenses and debt services

Maintenance- maintain equip and facility

Insurance covenant

Additional Bonds test- all debt after is subordinated unless needed for completion

Sinking fund

Catastrophe clause

Flow of funds/ priority of disbursing funds

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8
Q

Industrial Development Revenue Bonds

A

Issued to construct facilities or purchase equipment that is later leased to a corporation

Carries corporation debt rating

Payment of the issue is ultimately the responsibility of the corporation

Tax Reform Act of 1986 causes most of these to be taxed under the alternative minimum tax but not to those not filling under ATM

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9
Q

Lease rental bonds

A

Issued to finance office construction for itself or its state or its community

Example: building a school which is paid back by tuition

Basically a lease back agreement (make to lease)

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10
Q

Certificate of Participation

A

Form of lease revenue bond that permits investors to participate in revenue from lease, installment or loan payments

On specific equipment or land of municipal

Certificate holders could technically foreclose on the asset

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11
Q

Special tax bonds

A

Secured by one or more designated tax outside of property (ad valorem) tax

Does not have to be directly related to projects purpose

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12
Q

Special Assessment Bonds

A

Issued to finance the construction of public improvements such as streets sidewalks sewers

Property tax only on those benefiting

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13
Q

New housing authority bond

Sometimes called Public Housing Authority bonds or Section 8 bonds

A

Funds used to improve low income housing backed by US gov

Most secure of all municipal bonds

Backed by rental income of the houses

Not a double barreled because it’s second revenue source is US gov

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14
Q

Moral Obligation Bonds

A

State, local or agency issued bond

State legislature can appropriate funds to make payments, but not established by law

Revenue Bonds only

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15
Q

Issuer Default

A

Bondholders have right to sue if a GO bond goes into default

Moral Obligation Bonds would have to receive a legislative apportionment

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16
Q

Municipal Anticipation Notes

A

Issued for municipality that expects other revenue soon

Ones that aren’t exactly how they seem:
1. Bond anticipation notes- interim financing that will turn into long term funding

  1. Variable rate demand notes- fluctuating interest rate with a put options
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17
Q

Variable Rate Municipals

A

Offers interest tied to another specified interest rate

Price remains relatively stable throughout life

Usually reset to Market every 6 months

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18
Q

Auction Rate Securities

A

Tied to short term interest rates

Long term maturities of 20 to 30 years

Rate is determined by a Dutch auction at short term intervals at 7, 28, or 35 days

Typically issued by hospitals, utilities, nonprofit housing, university

Failed auctions are hazard as no demand may be found and may effect rating

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19
Q

State and Local Government Securities Series

A

US treasury securities directly issued to municipal issuers only in connection with pre refunding

Immediately invests in state or local gov securities

Directly issued by US Government

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20
Q

Build America Bonds

A

Taxable obligations but generally tax credits are given in lieu

Assist in reducing costs to issuing municipalities and to stimulate economy

Two types:
1. Tax Credit BABs- fed income tax credit equal to 35% of interest paid on bond during year, may be carried forward

  1. Direct Payment BABs- Provide municipal issuer with payment of 35% of interest

Currently not instated

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21
Q

Bond Contract

A

Collection of legal documents that includes a bond resolution, applicable law, and other legal docs pertaining to the issue or issuer

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22
Q

Bond Resolution

A

Municipality authorizes issue and sale of securities through this

Most include the indenture to increase marketability

Not required by law

Serves as a contract between issuer and trustee

Flow of funds statement is normally included and establishes the priority of payments from a facilities revenues

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23
Q

Official statement

A

Prospectus for a municipal

Includes a feasibility statement and any material information needed to be known

Must be given to investor before settlement date

May follow a preliminary official statement

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24
Q

Bond Counsel

A

An attorney specializing in tax exempt bonds

Either issues their legal opinion as a:

Qualified opinion- may be a legal uncertainty
Or
Unqualified opinion- unconditional

Some smaller issuers may not obtain a legal opinion and are marked ex legal

Ex legal mark allows bond to be issued in good delivery

Legal opinion is in regards to both the legality and tax exempt status of the issue

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25
Q

Negotiated underwriting

A

Investment banker underwrites and helps establish interest rate and offering price

Can be either a public offering or private placement

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26
Q

Competitive Bidding

A

Municipality posts an invitation to bid

Investment bankers respond requesting info and then bid, with lowest net interest cost winning

An official notice of sale is usually published in The Bond Buyer and local newspapers

Official notice of sale includes all information needed to make a bid including the amount of good faith deposit required to submit the bid

Bonds rating and underwriter name are not included because they haven’t been determined

All bonds are issued in fully registered or Book entry form

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27
Q

The Bond Buyer

A

Published every business day and offers info on primary bond market

Shows 30 day visible supply (total dollar volume in next 30 days expected)

Small supply means interest rates likely to fall

Placement/acceptance ratio indexes- percentage of total dollar value of sold over offered for sale

Also includes
40 bond index- daily price index, 20yr mature, includes 40 GO and Revenue bonds
20 bond- weekly, 20yr GO, A of better
11 bond- 11 of 20 20bond, AA or better
revdex 25- 25 rev bonds, 30yr mature, A or better

Yields for Revdex higher due to more risk in rev bonds

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28
Q

Thomson Muni Market Monitor

A

Offers current news items pertaining to secondary municipal market and current offerings

Secondary market

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29
Q

Real Time Transaction Reporting System

A

Provides information generated from the National Securities Clearing Corp to the public within 15 minutes

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30
Q

New Issue Worksheet

A

Presented by the Bond Buyer

Shows all information used in the official notice of sale

Schedule of year by year maturities

Bond years are the number of 1k bonds being sold by number of years outstanding

1000 bonds 2 yrs maturity= 20,000 bond years

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31
Q

Bond Years

A

Years to Maturity x # of bonds

Used to calculate the average life of an issue

Total bond years / total bonds

32
Q

Syndicate letter

A

Sent out to each underwriter two weeks before issue is awarded to be signed

Includes: level of participation
Priority order of allocation
Duration of syndicate
Appointment of managers as agent
Fees and breakdown of spread
Other obligations

Not legally binding till submission of bid

33
Q

Syndicate account types

A

Establishes the liability of each underwriter

2 types
Western account- Each underwriter is responsible for their own allocation

Eastern Account- Undivided, each underwriter is allocated a portion of the issue. Given a proportionate share of what is written

West is divided, east is united

If issues not sold, west is responsible for their share, east everyone takes their share

34
Q

Writing the scale

A

Process by which a syndicate will establish the reoffering yield (price)

Must determine what yield is necessary to sell the bond and then adding the premium to get to the bid

35
Q

Firm commitment

A

All competitive bids are submitted as firm commitments

No profit guaranteed

Will buy the whole issue no matter what

36
Q

Two possible reasons to award an issue

A

Lowest Net Interest Cost or the lowest True interest cost

NIC- combines proceeds with total coupon interest

TIC- combines same principals but also factors in TVM

A deposit is usually put down during the bidding process, around 1-2% of par

37
Q

Syndicate Account

A

Developed when the issue is awarded

Syndicate manager handles the books

All proceeds from the sale and expenses siphon out of the account

30 calendar day account

38
Q

Spread

A

Difference between the bid and ask

In the case of a syndicate, the purchasing price and the reoffering price

Production refers to the total dollars earned from a municipal issue

39
Q

Point

A

Management fees are referred to in points

1 point is equal to $10

40
Q

Total Takedown

A

Portion of the spread remaining after subtracting management fee

Syndicate members can either realize their full takedown or give a partial amount to other sellers

The concession is the amount that a seller will make by selling the bond

41
Q

Reallowance

A

Usually a syndicate will notify other buyers in the Bond Buyer

Typically, they are offered at a smaller discount typicall half the concession price

42
Q

Size of each portion of the spread

Small to large

A

Managers fee
Additional takedown
Concession

Syndicate member would receive total spread of it is the manager and sells the bond

43
Q

Order priority for Municipals

A

Must be defined according to the Municipal Security Board

Timeline Established:

  1. Order period- usually an hour the day after the awarded bid
  2. Of over-subscribed, order priority is followed. Explained on next card
44
Q

Order types in order from top to bottom in priority

A
  1. Presale order- entered before a syndicate wins the bid. Takedown is split among participants in the order
  2. Group net order- Placed after the bid is awarded, split between participants
  3. Designated orders- institutional order, allocates takedown to certain members
  4. Member and member related orders

Highest priority given to orders that benefit most members

Orders are summarized and sent to each member by syndicate manager

Pro Golfers Don’t Miss

45
Q

Municipal bond delivery

A

On a when-issued basis meaning, the bonds are authorized but not yet issued

Managing underwriter must register with a clearing agency, who is given notice of the coupon and settlement date

Syndicate then gives notice to buyers

Underwriters then send out final confirmations with the purchase price and settlement date

46
Q

Difference between dated date and settlement date

A

Dated date is the day in which interest begins to accrue.

Investor must pay interest from dated date up to the settlement date

47
Q

Criteria used to evaluate GOs or General Obligation Bonds

A

General Wealth of the community (because GOs are backed by tax revenues)

Quantitative (statistics) and Qualitative (community opinion) analysis

Debt limit and the city charter as they may restrict lending abilities

Municipality income from taxes and fines

Ad Valorem (Property) taxes- States/counties have right to seize land if tax not paid

The Official statement and the underlying financial statements-
look for possible future cash needs, and rating decreases
Also the debt statement, which sheds light on the debt structure (explained next)

48
Q

Debt Structure

A

Total debt
- self supporting debt(revenue bs)
- sinking fund accumulations
= net direct debt or GOs and short term notes
+ Overlapping Debt (share of county, school, park, sanitary debts)
= net overall debt

If net, then no self support or sinking fund

49
Q

Criteria used to evaluate revenue Bonds

A

Based on facilities potential to generate money to cover operating expenses, principal and interest expenses

Should consider the following:
Economic Justification
Competing facilities
Sources of revenue
Call provisions (the higher the premium the better)
Flow of funds
Debt service coverage
50
Q

Net revenue pledge (typical flow of funds)

A
  1. Operations and Maintenance
  2. Debt service Account- Used to pay in year interest and principal maturing
  3. Debt service reserve fund- Can hold one year debt service
  4. Reserve maintenance fund- supplements general maintenance
  5. Renewal and replacement fund- reserve fund for major renewal or equipment replacements
  6. Surplus (sinking) fund

If operations and maintenance is not first, debt repayment is (gross revenue pledge)

51
Q

Municipal Debt Ratios (more important to understand than calculate)

A
  1. Net debt to assessed value: debt per assessed property value, alternate uses estimated (preferred). 5% is reasonable
  2. Taxes per capita: tax income of city/person
  3. Debt per capita: city debt per person
  4. Debt trend: whether ratios are rising or falling
  5. Collection Ratio: Taxes collected / assessed
  6. Coverage Ratio: how many times revenue will cover debt service, 2:1 is acceptable
52
Q

Outside factors effecting both Revenue and GO bonds

A

Interest Rate comparisons amongst similar bonds (smaller market due to uniqueness)

Municipal Bond Insurance- typically lowers interest yield but offers more safety

Bond Rating- S&P or Moody rating

Moody- MIG 1-4 is good, SG is speculative
S&P- SP-1 through 3
Fitch F-1-3

53
Q

Quotations of Municipal bonds

A

Sold in the OTC market

Interest or solicitation by a municipal dealer would be considered a quotation request

Basis quote- Priced on a yield to maturity basis called a basis quote

Some revenue bonds are quoted on a % of par dollar basis and are called dollar bonds
Ex. 104 means 104% of par

54
Q

Bona Fide Quotation

A

To be considered bona fide, a dealer must be prepared to sell at the price

The quote must reflect the dealers best judgement and have a reasonable relationship to the fair market value

May reflect firm inventory/expectation of market direction

Quotations are subject to prior sale or change in price

55
Q

Four types of quotations

A
  1. Bona Fide
  2. Workable indication- bid price at which a dealer will purchase securities from another dealer. Able to be revised.
  3. Nominal (subject) quotation- Indicate a dealers estimate of a securities market value
  4. Out firm with recall quote- Good for an hour with a 5 minute recall period (if a firm receives an offer after another one, they can give a 5 minute period where the original buyer has to commit)
56
Q

Secondary market joint or trading account

A

Formed by a group of investment bankers to purchase large blacks of bonds from institutions and resell them

Joint account can only issue one quote when reselling bonds

30 calendar days to settle

57
Q

Report of sales of Municipals

A

MSRB rules prohibit false reports of trades

Municipal dealers report trades with other dealers to the National Securities Clearing Corp. Must include the names and accrued interest

58
Q

Round lot for Municipals

A

100,000 in face

59
Q

Broker’s Broker

A

Some only trade with banks and other municipal brokers

Do not disclose ID of customers

Do not maintain an inventory of bonds

60
Q

Reciprocal dealings (antireciprocal rule)

A

Cannot solicit trades in Municipals from an investment company in return for sales by dealer of share or units in the investment company

61
Q

MSRB Rules on Municipal trading

A

Suitability of client must be tested before a recommendation is made

Should not put Municipals in an IRA or 401k

Best suited for those who want income

Can open the account but not make recommendations if info not available

Cannot guarantee against loss, share in profits, or misuse funds

If a control relationship (the dealer has control in the issuer) additional disclosure is needed in the form of writing to the client usually on the confirmation.

62
Q

Markups vs Commission

A

Commissions- When a dealer acts as an agent by buying trades for a customer it charges commission

Markup- When a dealer acts as a principal (buying and selling for its own inventory), it charges a markup when selling to customers and a mark down when buying from customers

63
Q

Principal Transactions

A

Executed at a net price including the markup markdown

Factors in the trade include:
Best judgement of FMV
Expenses of transaction
Dealer is entitled to a mark up or down (not disclosed)
Total dollar amount
Value of exchanged securities

The markup or markdown is not disclosed on the confirmation

64
Q

Agency Transactions

A

Executed for a commission

Trading outside of the dealers holdings

Take into consideration:
Security's available
Expense of execution
Value of services provided
Amount of other compensation received

Commissions are disclosed to the customer

65
Q

Confirmation disclosures

A

Must describe security, list fade date, settlement date, accrued interest, firm info, and whether acting as agent or principal

MSRB rule: When disclosing yield on a callable bond, must state the lower of YTM or YTC.

For discount bonds it is YTM, premium bonds it’s YTC

If there are a number of call dates on premium bonds, then use near term in whole call

Variable Rate Bonds, bonds in default, and bonds sold at par have no yield specified

66
Q

Required info on confirmations

A

In agency Transactions, the other party and the amount of commission must be disclosed

The dated date of it affects interest calculation

Whether the securities are fully registered, registered to principal only, book entry form or in bearer form

Whether the security is called or pre refunded

Any special qualification or factor that might affect payment

Whether bond interest is taxable

67
Q

Broker/dealer acting as an Financial Advisers to municipal securities issuers

A

Relationship exists when a muni dealer provides advisory or consulting services to an issuer with respect a new issue

Conflict of interest would arise if FA acts as both underwriter and FA and is banned by MSRB

Can still help prepare official statement, and buy from the underwriting for customers (customers must be informed)

Cannot use confidential info to solicit purchases or sales

68
Q

Tax Reform Act of 1986

A

Restricted fed income tax exemption for municipal bonds to public purpose bonds

If more than 10% of proceeds go to private parties, it’s considered a private activity bond

69
Q

Calculation for determining tax benefits of a municipal

A

Tax free yield/ (100%-tax rate) = yield required

To reverse

Yield of other X (100%-TR) = yield in tax free

Use the Yield to Maturity

Expenses related to the purchasing and holding of the Municipals are non deductible

Exception *- banks purchasing certain issues of GO bonds can deduct 80% of interest

70
Q

Property taxes

A

Property taxes are not issued by states and therefore cannot be conterminous

71
Q

To be double barreled, a bond must be backed by

A

2 different municipal revenue source

72
Q

Dated date

A

No longer used after first interest payment is made

73
Q

Contra broker

A

Not necessary as long as it is stated that the name is available upon request

74
Q

Schools

A

Financed by GO bonds in general

Hospitals, airports and golf courses are usually financed by revenue Bonds

75
Q

Moody’s investment Grade Rating are applied to

A

Municipal notes, not municipal bonds

76
Q

Bond Placement Ratio

A

$ value of new issues sold divided by dollar value of the new issues offered

77
Q

Callable municipal bonds

A

Call premiums tend to decrease over time
And
Call prices are stated as a percentage of the principal amount to be called

Series 7- Passed with 83% (19 decks)

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