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Series 7 Chapter 6 > Chapter 6 > Flashcards

Chapter 6 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

GO Bond General

A

State (not federal)
Backed full faith taxes , sales tax, ad volerem (real estaate, license plate, etc)
Require voter approval for taxes to fund
Debt limit

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2
Q

Rev Bond General

A

No voter approval required
Self supporting project backed by source (stadium, tolls)
User charge
Need feasibility study
Revenue bonds are usually structured so their maturity is shorter than that of the facility they were issued to build.
Debt service coverage ratio and management important to assess
Covenants unique to rev bond

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3
Q

IDR/ IDB Bond

A

Muni rev bond
Backed by corporate credit on leaseback
ie. build hospital and lease hospital
Interest on nonpublic purpose bonds subject to AMT tax
Industrial revenue bonds are issued by a municipality or an authority established by a municipality. No municipal assets or general revenues are pledged to secure the issue. The net lease payments by the corporate user of the facility are the only source of revenue for debt service.

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4
Q

Limited tax GO

A

More risk than typical bond
Secured by specific tax
GO Bond

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5
Q

Double barreled bond

A

Rev bond
Interest and principal are paid from specified facility earnings
a bond that has its principal and interest backed by revenues of a facility and the general taxing authority of a municipality.

ie. Revenue bond backed by full faith of city

Double-barreled bonds are backed not only by a specified source of revenues, but also by the full faith and credit of a municipal issuer with authority to levy taxes. Double-barreled bonds are sometimes classified in the broader category of general obligation bonds.

Explanation
When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, this is referred to as a double-barreled bond

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6
Q

Coterminous debt

A

overlapping debt
Includes county, city, and school district
NOT STATE

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7
Q

Moral obligation bond

A

Revenue bond
legislative authority can appropriate funds to make payments if issuer defaults , make more marketable
Increased credit risk, typically issued in times of financial distress

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8
Q

NHA/PHA/ Section 8/ HUD

A

Revenue bond
Only muni backed in full by the US government
Issued to help finance low and moderate income public housing

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9
Q

Demand note/ ARS/ Variable note

A

Fed tax exempt, hedge against inflation, interest rate reset, say every 6 months
Price remains relatively close to par

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10
Q

Taxes with muni bonds

A

Federal tax exempt
Buy muni in state live in exempt from state taxes
Territorial bonds (ie. puerto Rico)- Exempt taxes at all levels

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11
Q

Bond covenant

A 
Rev bonds
Rate convenant
Insurance
Additional bonds test
Sinking fund
Catastrophe clause
Flow of funds
Books and record covenant
Call features
The trust indenture of a bond contains the protective bond covenants. Within the bond covenants can be found the rate covenant which is a statement explaining that rates or user fees will be maintained at a level sufficient to cover the debt service and operating expenses for the bond issue.
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12
Q

Municipal anticipation notes

A

Short term notes

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13
Q

Bond buyer

A

Publishes 30 days visible supply- dollar amount of muni bonds (not notes) expected to reach the market in the next 30 days
Includes only bonds, no notes
Shows placement/acceptance ratio index (% total dollar value of new issues sold versus total dolla vlaue of new issues ofered for sale prmior week)
Small supply, interest rates fall,
If placement ratio high, market for muni bond strong
Contains 40 bond index (40 Go and Rev bond with maturity of 20 years) , 20 bond index, 11 bond index (AA or better) Revdex 25 (30 yr maturity rated A or better)
Yield Revdex higher than Go20 bond index b/c rev bonds have more risk
Primary market muni bond issues
“The Bond Buyer” is a daily trade publication containing news about new municipal bond issues.

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14
Q

Thomas Muni Market Monitor

A

Most up to minute info secondary muni bond market

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15
Q

Normal order allocation priority syndiate latter

A

Presale, Group, Designated, member (Pro Golfers don’t miss)
Member:A syndicate member in a municipal underwriting wishes to place an order with the manager for its own portfolio
Disclosure necessary to allocate orders
Syndicate members must accept priority in writing
Must in two biz days note how allocated in writing

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16
Q

Net Revenue Pledge

A

Most common, revenue bonds
Operating and maintenance expenses are paid first
Remaining funds used to pay debt service

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17
Q

Gross revenue

A

Debt service is played first

Operating and maintenance expenses first

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18
Q

Debt service coverage ratio

A

Analyze Revenue bond
2:1 considered adequate level
Net revenue/debt service
net rev (Re

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19
Q

Broker’s Broker

A

Only trade with banks and other muni brokers (don’t trade with individuals)
Help sell unsold portions of new bonds
Protect identity of their customers covers
Act solely as agents and do not maintain an inventory of bonds
A broker’s broker helps sell any bonds a syndicate has left and does not disclose the identity of the firm on whose behalf it is acting. Brokers’ brokers do not charge fees for quoting a security, do not maintain inventory, and act solely as agents.
A broker’s broker acts as agent in transactions by facilitating the movement of blocks of bonds. The broker’s broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker’s broker does not make a market in securities.

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20
Q

Disclosing yield

A

MSRB requires yield shown on customer confirmation be the lower of YTM or YTC
For discount bonds, lower is YTM so this is disclosed
Exceptions: VAR Bonds, bonds in default, bonds sold at par

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21
Q

EMMA

A

Presented for retail nonprofessional investors, makes available OS’s for most new muni bond offering
EMMA (Electronic Municipal Market Access) is a centralized online site that nonprofessional, retail investors can use to locate key information about municipal securities. Available on this site are official statements for most new municipal bond offerings and up-to-the-minute access to prices for outstanding municipal bonds.

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 330). Wiley. Kindle Edition.

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22
Q

Tax equivalent yield

A

Compare vs. taxable
In every case but one, the yield to maturity is the effective after-tax yield to a municipal-bond buyer. The one exception is a bond bought at a discount in the secondary market. In this case, the annual accretion is taxed as ordinary income.

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23
Q

net debt calclation

A

Total debt - self supporting debt- sinking fund = net direct debt+ overlapping debt = net total debt

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24
Q

Underwriter syndicate arrangements

A

Western; divided account, only responsible for its own underlying allocation
Eastern: undivied, each underwrited alloate additonal bonds representing in proportionate share of any unsold bonds

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25
Q

Spread

A

Syndicate compensation for underwriting new issues

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26
Q

Total takedown

A

Spread that remains after subtracting management fee

Includes additional takedown (paid to syndicate members when bonds are sold through a selling group)

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27
Q

Concession

A

Paid to the selling group

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28
Q

TIC

A

Cost comparison using time value of money
Interest cost to the issuer is reduced by any premiums received by the issuer when the bonds are initially sold or is increased by any discounts the issuer must accept when the bonds are initially sold. Reducing interest cost by the amount of any premium received or increasing interest cost by the amount of the discount the bonds are sold at, is how the issuer will arrive at the net interest cost (NIC).

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29
Q

Calculating accrued interest

A

Corporate and muni (30/360)
Gov securities (365)
Go back and include last interest payment date
Go up to but not including settlemet date

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30
Q

Muni bond bought at a premium

A

Amortization reduces cost basis, reduces reported interest income

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31
Q

Official notice of sale

A

The official notice of sale contains the information a syndicate needs to prepare a bid, including the amount of the good faith deposit the syndicate must submit with the bid. The delivery date has not been determined. The syndicate develops the yield for each maturity and the agreement among underwriters.

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32
Q

Legal opinion in muni bonds

A

opinion covers two main issues: constitutionality (i.e., it ensures that the bonds are legal, valid, and binding obligations of the issuer) and verification of the tax status of the debt (i.e., interest on the bonds is exempt from federal income taxes as well as state and local taxes in some cases).

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33
Q

Syndicate letter

A

The syndicate letter (also called the agreement among underwriters, syndicate agreement, syndicate account letter, or account summary report) is the document that forms the syndicate and spells out each member’s rights and obligations. The allocation of the new bond offering that is accorded each syndicate member is detailed in this agreement.
Not legally binding until the syndicate submission of the bid

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34
Q

Insured muni bond requirements

A

Although it is likely that the confirmation would include a statement that the bonds are insured, it is also necessary to provide the client with some proof of that insurance, either on the bond itself or, in the case of book entry delivery, as a separate document.

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35
Q

Original issue muni bond discount tax

A

Under IRS rules, an owner of an original-issue municipal discount bond must adjust the bond’s cost basis by accreting the discount over the life of the bond. The accretion is not taxed.

36
Q

Net interest cost calculation

A

The coupon rate and dollar price are important to the issuer because they determine the actual cost of borrowing
TIC same calculation but adjusts for time value of money

37
Q

MSRB confirmation

A

The broker/dealer must always disclose the capacity in which it acted (principal or agent). The confirmation must show the name of the person for whom the trade was executed (the customer). The name, address, and telephone number of the broker/dealer must be shown so the customer may easily contact the firm. The settlement date is also required. The broker/dealer is not required to disclose where it acquired the bonds or the price it paid.
Need written confirmation (T+2)
MSRB rules require that certain information be included on all municipal confirmations, including the capacity in which the firm acted in filling the order, whether the bonds are in registered or book entry form, and any relevant call provisions. Information on catastrophe or extraordinary call provisions is not included on a confirmation because catastrophes have no planned dates of occurrence.
Catastrophe call provisions associated with municipal revenue bond issues are not included on customer confirmations. Only call provisions with specific dates are included on confirmations.
Whether subject to AMT tax
Dated date if impacts accrued interest
MSRB confirmations must include the customer’s name, trade and settlement dates, coupon rate and maturity, and the yield to maturity or yield to call (whichever is lower). The current yield (annual interest/current market price) is not included on confirmations

38
Q

Short term financing

A

Municipal short-term notes (tax anticipation notes, revenue anticipation notes, grant anticipation notes, and bond anticipation notes) are used as interim financing until a permanent long-term issue is floated or until tax receipts increase or revenue flows in.

39
Q

Revdex

A

evdex is an index of yields on 25 revenue bonds with 30-year maturities that are traded in the secondary market.

40
Q

Collection ratio

A

The collection ratio measures taxes collected versus taxes assessed. It is a tool used in analyzing GO bonds, which are backed by the taxing authority of the issuer. Revenue bonds are backed by user fees, not taxes.

41
Q

Eastern

A

An Eastern account has both undivided liability when purchasing the bonds from the issuer and undivided responsibility for bonds that remain unsold.

42
Q

MSRB Control

A

A control relationship exists if someone represents both an issuer and municipal securities dealer.

43
Q

MSRB Prefunding

A

MSRB rules require that, when a call date has been fixed by a prerefunding, the yield to call so fixed must be reflected on the confirmation statement. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event. Therefore, it is appropriate to price the bond to the call date. The old maturity on the bond has no further significance.

44
Q

Scale

A

The scale, or reoffering scale, represents the prices and/or yields at which new issue securities are offered for sale to the public by the underwriter. The syndicate uses this scale to determine its bid on the issue.

45
Q

Muni bond debt

A

Municipal bond analysts examine an issuer’s total debt to determine an issue’s safety. Debt that is not a burden on the municipality is not included in total debt. Defeased debt and paid-up debt can be removed from the municipality’s debt accounts. Direct debt is debt issued by the municipality, and overlapping debt is the municipality’s share of debt issued by authorities that draw revenues from the same sources as the municipality. Together, direct debt and overlapping debt constitute the municipality’s total debt.

46
Q

Group net order

A

Second behind presale
A municipal group net order is credited to syndicate members according to their percentage participation in the account. This order type is given priority over designated or member takedown orders (but not over presale orders). The normal order of priority is presale orders, group or syndicate orders, designated orders, and member orders.

47
Q

Locate requirement short sales

A

all

48
Q

Syndicate letter

A

The syndicate letter lists the terms under which members will conduct the sale of the bonds. It also describes each member’s sharing of profits and expenses, the type of business entity (i.e., joint venture or partnership), and the good faith deposit required.
The syndicate letter (also called the agreement among underwriters, syndicate agreement, syndicate account letter, or account summary report) is the document that forms the syndicate and spells out each member’s rights and obligations. The allocation of the new bond offering that is accorded each syndicate member is detailed in this agreement.

49
Q

prefunded bond

A

When a bond issue is prerefunded, the issuer is going to redeem the bond on the first call date. The yield must be quoted to call.

50
Q

trading flat

A

When a bond trades flat, the buyer does not owe accrued interest to the seller. Trading flat means there is no accrued interest due. While it is true that a bond in default trades flat, one cannot say that the term trading flat means the bond is necessarily in default.

51
Q

Average life

A

total bond years, / total number of bonds

52
Q

Western account

A

Divided account, each underwriter only responsible for its own underwriting allocation

53
Q

Accrued interest (corporate/muni vs. government securities)

A

Corporate/muni- 30 day/360

Government securities: actual day, 365 days

54
Q

Official notice of sale

A

The official notice of sale contains the information a syndicate needs to prepare a bid, including the amount of the good faith deposit the syndicate must submit with the bid. The delivery date has not been determined. The syndicate develops the yield for each maturity and the agreement among underwriters.

55
Q

MIG

A

Apply to muni short term notes (rev anticipation notes)

56
Q

TAN

A

Tax anticipation notes, finance current operations in anticipation of future tax receipt

57
Q

MSRB governs

A

The MSRB governs the practices of underwriting and trading municipal bonds. It does not govern municipal issuers.

58
Q

Qualified go bond deduction

A

A bank-qualified municipal bond issue is a small issue, generally a GO issue of $10 million or less. If a bank were to purchase any part of a qualified issue, 80% of the annual costs necessary to fund the purchase would be tax deductible to the bank

59
Q

Section 8/ PHA/NHA

A

Section 8 bonds are municipal revenue bonds backed by the U.S. government issued to help finance low and moderate income public housing. They are also known as Public, (PHA) or New, (NHA) housing authority bonds.

60
Q

Muni bond prefunded

A

When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be pre-refunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of pre-refunded bonds is AAA, as they are now backed by U.S. government securities.

61
Q

Official statement

A

The official statement identifies the issue’s purpose, the source from which the interest and principal will be repaid, information regarding the issuer’s financial and economic background and information relating to the issue’s creditworthiness.
The items that you find on an official statement include the offering terms, the underwriting spread, a description of the bonds, a description of the issuer, the offering price, the coupon rate, the feasibility statement, and the legal opinion.

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 333). Wiley. Kindle Edition.

62
Q

Total takedown

A

When a member of the syndicate sells a bond they are entitled to the total takedown. In this case, 1 point ($10) per bond (1,000 bonds sold × $10 per bond = $10,000 profit). Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead.

63
Q

Synidate/Joint account

A

A syndicate or joint account helps spread the risk of underwriting an issue among a number of underwriters. In this case, banks and broker/dealers who deal in municipal securities. The issuing municipality would not be a member of the syndicate (joint account) formed for the purpose of selling their municipal securities to the public.

64
Q

Discretionary account

A

As with all discretionary accounts, a principal must approve transactions promptly after execution and the account must be reviewed frequently by a principal. Because this is a discretionary account which allows municipal securities to be traded in it, these functions must be performed by a municipal securities principal. Without the customer’s consent, the broker/dealer cannot effect transactions in the customer’s account for municipal securities in which a control relationship exists between the broker/dealer and the issuer. To effect such transactions, the broker/dealer must make full disclosure of the relationship and obtain the customers consent, but termination of the relationship is not required.

65
Q

Reciprical Immunity

A

The principle that neither the states nor the federal government may tax income received from securities issued by the other is known as the doctrine of reciprocal immunity. States may, however, tax the interest on debt securities of other states. This doctrine provides the original basis for the federal income tax exemption on interest paid on municipal debt securities.

66
Q

Muni bond advertising

A

Need principal approval in writing prior
Maintain records for three years
If the Advertising Regulation Department determines that a member firm has not adhered to FINRA’s content standards, it may require the firm to file some or all of the firm’s communications (including retail communications, correspondence, and institutional communications) 10 business days prior to use

67
Q

Special tax bond

A

A special tax bond is backed by one or more designated taxes (sales, cigarette, fuel, alcohol, etc.) other than ad valorem taxes. The designated tax need not be directly related to the project purpose. These bonds are not considered self-supporting debt.

68
Q

AMT (Tax reform 1986)

A

IDR bonds may have to pay b/c tax exemption made for public purposes
Created to make wealthy pay tax
Add excess AMT
Accelerated depreciation,, R&D and intangible drilling, local tax and interest, tax exempt on private person
Stock options exceeding value

69
Q

Closed end provision

A

These additional issues are also known as junior lien bonds. Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility.

70
Q

ARS (VRDO)- muni bonds

A

long term maturities ties to short term interest rates
Dutch auction method uses
Interest rate current period based on interest rate in prior period
Failed auctions possible
Price remains at par b/c resets
Interest rate tied ot some other interest rate
Basic info must be sent to SHORT including interest rate for next peiriod
Embedded put options, maturity the next put date
Credit enhancements
Low correlation with stocks and bonds

71
Q

Muni bond confirmation

A

Customers must receive a written confirmation of each municipal securities executed for their account. The confirmation must describe the security; list the trade date, settlement date (T+2), and amount of accrued interest; state the firm’s name, address, and phone number; and indicate whether the firm acted as agent or principal in the trade. A confirmation that does not include the time of execution must indicate that this information will be provided if the customer requests it.

Note that confirmations involving municipal securities must show any mark-ups or mark-downs. This is an MSRB rule not a FINRA rule.

Commissions would also be listed, if applicable, on the confirmation

72
Q

Types of quotes

A

A basis quote may be listed as 7s 25 at 7.5

This is a 7% coupon for a bond maturing in 2025 with a YTM of 7.5%. If the YTM is greater than the coupon we can determine that the bond is trading at a discount.

A price quote may be listed as 7s 25 at 99.5

This is a 7% coupon for a bond maturing in 2025 with a price of 99.5% of par or $995. If the bond is trading at a discount we can determine that the YTM is greater than the coupon.

For those trading bonds it is easy to turn a basis quote into a price quote or turn a price quote into a basis quote (there is software for that).

A zero coupon bond would be listed with Zr indicating the bond pays no interest: Zr 25 at 10

73
Q

BAN

A

Short term financing

Interest paid at maturity

74
Q

Debt service coverage ratio solve

A

Under a net revenue pledge, bondholders are paid from net revenue, which equals gross revenue minus operating and maintenance expenses. In this example, net revenue is $12 million ($30 million − $18 million). Debt service is the combination of interest and principal repayment. Here, debt service is $6 million ($4 million + $2 million). To compute the debt service ratio, divide net revenue by debt service: $12 million / $6 million = a ratio of 2 to 1.
2:1 considered good coverage for revenue bonds

75
Q

Control position with discretionary account

A

Even though the representative has discretionary authority to trade the account, the MSRB requires that the representative receive customer permission prior to purchasing bonds where the firm has a control relationship with the issuer.

76
Q

Client wants to buy muni bonds but no info given

A

When a customer wants to buy a specific municipal bond and possesses all of the bond’s material information, MSRB Rule G-19 allows the representative to execute the order and mark it “unsolicited.” The representative may not recommend any municipal bond without first knowing the customer’s financial objectives and tax status.

77
Q

SLG

A

State and local government securities (SLGS) are issued not by a municipality but by the U.S. Treasury Department to assist local governments in complying with arbitrage restrictions imposed by the IRS.

78
Q

Serial maturity

A

Serial maturity means that within a single issue, portions of the issue mature at intervals. Municipal bonds typically mature serially.

79
Q

40 bond index

A

40 GO and rev bond with 20 yr avg maturity rated, with rating of A or better

80
Q

MSRB Rules

A

MSRB rules require that confirmations include whether the trade was executed on a principal (dealer) or agency basis. The amount of the dealer’s markup or markdown on a principal trade does not have to be disclosed, but the commission on an agency

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 338). Wiley. Kindle Edition.

81
Q

Muni div and cap gains

A

10) Dividends that are distributed by municipal bond funds are federally tax-free, but any capital gain distribution is taxable. Choice (C) is the right answer.

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 373). Wiley. Kindle Edition.

82
Q

GAN

A

GANs are grant anticipation notes, which a municipality issues to provide temporary financing while waiting for a grant from the U.S. government.

Rice, Steven M.. Series 7 Exam For Dummies (For Dummies (Business & Personal Finance)) (p. 374). Wiley. Kindle Edition.

83
Q

Good faith deposit

A

A good faith deposit is required when the syndicate places a bid on a competitive offering. It is generally 1% to 2% of the par value of the bonds offered for sale. If the bid is unsuccessful, the deposit is returned by the issuer to the syndicate manager.

84
Q

Muni bond basis yield

A

When a bond is referred to by a yield percentage, it is the coupon (nominal or stated) yield being referenced. Basis yield refers to yield to maturity (YTM). Hence, a 6% bond currently trading with a 6.5% YTM is correct.

85
Q

Bond resolution

A

The bond resolution (or the bond contract) spells out the characteristics of the issue (maturities, call features, etc.), the issuer’s responsibilities to bondholders, and any restrictive covenants to which the issuer must adhere. Costs to be incurred by the issuer have no impact on bondholders.
The bond contract describes the nature of the contract and the issuers’ duties to bondholders. The bond contract is a more expansive document than a bond resolution. The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance.
Includes flow of funds

86
Q

Broker dealer time period to be examined

A

Each municipal broker-dealer must be examined at least once every four calendar years to ensure that the firm is in compliance with MSRB regulations,

87
Q

COP

A

A municipal certificate of participation is a form of municipal revenue bond. In this case, investors participate in lease or loan payments of a program; the bond isn’t secured by the revenues. Although COPs aren’t necessarily legally viewed as debt of the municipality, holders of the COPs can foreclose on the equipment of the facility backing the COP in the event they don’t receive expected payments.

Series 7 Chapter 6 (1 decks)

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