Chapter 8: Municipal Bonds Flashcards
A client purchases a new municipal zero-coupon for 80. If he holds the bond to maturity what is his tax consequence?
If a zero coupon bond is held to maturity there will be no losses or gains
If an investor purchases 6 1/2 revenue bonds at 96 (subsequent to the original issue, which was at par) and holds them to maturity, the difference between 96 and par is
- A. a capital gain
- B. a capital loss
- C. taxable income
- D. non taxable income
A. capital gain
An individual has a house on the market with a market value of $350,000 and an assessed value of $300,000. What is the ad valorem tax if the tax rate is 24 mills?
- A. $720
- B. $840
- C. $7,200
- D. $8,400
C. $7,200
- Mills has 2 L’s, so you need to have two zeros after the decimal point.
- $300,000 * 24 * 0.001 = $7,200
A municipality generates $10,000,000 in revenues from a facility. It must pay off $6,000,000 in operating and maintenance expenses, $1,500,000 in principal, and $500,000 in interest. Under a net revenue pledge, what is the debt service coverage ratio?
- A. 1 to 1
- B. 1.5 to 1
- C. 2 to 1
- D. 4 to 1
C. 2 to 1
- Debt service coverage ratio = net revenues / (P + I)
- Debt service coverage ratio = ($10,000,000 - $6,000,000) / ($1,500,000 + $500,000)
- $4,000,000 / $2,000,000 = 2 to 1
Rank the following municipal bonds in order from safest to riskiest.
- I. Revenue bonds
- II. Moral obligation bonds
- III. Public housing authority bonds
- IV. Industrial development revenue bonds
- A. I, II, III, IV
- B. III, II, I, IV
- C. II, III, IV, I
- D. II, IV, III, I
B. III, II, I, IV
Suffolk County, New York, would like to even out its cash flow. Which of the following municipal notes would Suffolk County MOST likely issue?
- A. RANs
- B. BANs
- C. CLNs
- D. TANs
D. TANs
- RANs = revenue anticipation notes
- BANs = bond anticipation notes
- CLNs = construction loan notes
- TANs = tax anticipation notes, provides even cash flow
An investor is in the 30% tax bracket. Which of the following securities would provide him with the BEST after tax yield?
- A. 5% GO bond
- B. 6% T-bond
- C. 7% equipment trust bond
- D. 7% mortgage bond
A. 5% GO bond
- TEY = municipal yield / (100% - tax rate)
- 5% / (100% - 30%) = 7.14%
Which of the following municpal bonds is backed by lease payments made by an underlying facility?
- A. IDR
- B. LTGO
- C. LRB
- D. BAB
C. LRB
- IDR: industrial developmet revenue bonds are backed by corporations
- LTGO: limited tax general obligation bonds are a type of GO that is backed by taxes that are not used to back other bonds
- LRB: lease revenue bonds are similar to IDRs but instead of bonds being backed by corporations they are backed by lease payments made by office buildings, universities, prisons, etc
- BAB: build america bonds are taxable municipal bonds in which the US Treasury either reimburses the issuer or gives a tax credit to investors for up to 35% of the interest cost
Which of the following is true about advertising for a municipal fund security?
- it must be approved by a principal of the firm selling the securities
- it must not be fradulent
- it must first be approved by the MSRB
- it must be approved by the state administrator in each state in which the security is sold
- A. I only
- B. I and II
- C. III and IV
- D. I, II, III, and IV
B. I and II
Straight-line amortization of a municipal bond purchased at a premium will cause which TWO of the following?
- reduction of the bond’s cost basis by equal amounts each year
- increase of the bond’s cost basis by equal amounts each year
- increase of the amount of potential capital gain each year
- reduction of the amount of potential capital gain each year
A. I and III
B. I and IV
C. II and III
D. II and IV
A. I and III
- Straight line amortization of a bond’s premium reduces the cost basis of the bond by an equal amount each year. The cost basis of the bond is decreasing each year; therefore, the chance of the holder’s selling the bond at a capital gain (above the cost basis) increases each year.
If a bond is stamped ________ it does not contain a legal opinion.
Ex legal
________ is a free comprehensive online source of information about municipal bonds that is designed spefically for the non professional investor
EMMA
________ is a wire service which provides general information about proposed municipal securities, muni prices, and general information relevant to the muni bond market.
Thompson Muni Market Monitor (formerly Munifacts)
A ________ provides investors with contract terms including the coupon rate, years until maturity, collateral backing of the bond if there is any, etc.
Bond resolution (indenture)
New registered reps cannot engage in muni securities business with the public for their first __ days in the industry.
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