Chapter 8-Tax free Bonds

Question 1

Large municipal bond funds are able to ___ and have ___.

Answer 1

Buy bonds more inexpensively than individual investors; seasoned analysts who can focus on filtering in best bond issues

Question 2

If you believe interest rates are going to fall the next few years, ___ will likely appreciate more than ___.
That’s because ___ are risk free and thus seen as ____ during uncertain economic times.

Answer 2

Long-term gov securities; quality long-term corporate bonds

Long-term gov securities; more desirable

Question 3

From 1970-2015, municipal bonds had an annual default rate of __; AAA & AA rated municipal bonds had __ defaults.
Investment grade municipal bonds had 10-year default rate of __ from 1970-2009 vs. ___ for investment grade corporate bonds.
___ of municipal defaults came from health care & ___ sectors.
Average recovery rates for municipal bonds is ___ for corporate senior unsecured bonds.

Answer 3

.09%; 0
.06%; 2.5%
73%; housing
significantly higher than

Question 4

Municipal bond returns during S&P 500 stock declines …
8/1987-12/1987 ___ for stocks vs ___ for Barclays Municipal Bond Index
7/1990-10/1990 ___ for stocks vs ___ for Barclays Municipal Bond Index
7/1998-8/1998 ___ for stocks vs ___ for Barclays Municipal Bond Index
3/2000-10/2002 ___ for stocks vs ___ for Barclays Municipal Bond Index
10/2007-3/2009 ___ for stocks vs ___ for Barclays Municipal Bond Index

Answer 4

-33% vs -1%
-19% vs -1%
-19% vs 2%
-47% vs 25%
-56% vs 12%

Question 5

Barclays ___ bond index is a total return index of ___ investment-grade long-term bonds with __-year average maturity.

Answer 5

Municipal; 17,700; 13

Question 6

4 arguments against UITs …
1) ___ can be as high as 5.5%
2) for any investors wanting to sell before maturity, spreads on ____ for longer-term trusts.
3) Less of your ___ is earning you money as some of the UITs mature, are sold, or are __ before the UIT’s maturity date.
4) Return of ___ isn’t desirable when ___ are falling because the investor now has new money that can’t be invested at same higher rates as before.

Answer 6

Front end loads
Bid-ask prices range from 1.5%-5.5%
Principal; called
Principal; interest rates

Question 7

Unit Investment Trusts (UITs) are ___, ___ with a ___ life.
Only a small number of UITs invest in ___.
A major selling point of UITs is ___, but these portfolios are supervised enough to where ___.

Answer 7

Unmanaged, fixed portfolios; finite
Municipal bonds
Ongoing fees are often low; problem bonds can be sold

Question 8

Closed-end ___ bond funds constitute the ___ in the close end universe.
Close end-funds include _____.

Answer 8

Municipal; largest segment
National, single-state, insured, & high-yield varieties

Question 9

Attractive attributes of close end bond funds include …
1) these funds appeal to traders looking to buy ___ and sell___
2) these funds aren’t forced to ___ to raise cash to meet redemptions in unfavorable times. They don’t need to ___, so they can remain focused on whatever generates ___.
3) ____ can do better than unleveraged mutual funds during periods of stable or ___ interest rates.

Answer 9

1) low; sell
2) sell bonds at a discount; meet minimum cash requirements; positive alpha
3) Leveraged close-end products; declining

Question 10

High-yield municipal bond funds don’t have as much ___ as their corporate counterparts.
Some junk funds may move a portion of their assets into ___ when the yield spread between the two ___ to the point where there is not enough to compensate investors for added __.

Answer 10

Default risk
better grade bonds; narrows; risk

Question 11

Single-state funds catering to their own state’s residents offer ___.
Single-state funds usually emerge in ___ states with ____.

Answer 11

Double income tax exemption
Populated; high tax burdens

Question 12

Muni bond funds that hold debt issued by a number of states-offer ___; some states have ___ than others.

Answer 12

Geographic diversification; riskier bonds

Question 13

Tax-free bonds have ___ of similar-rated & similar-maturing treasury/agency bonds.

Answer 13

33%-50% of the volatility

Question 14

In theory, municipal bond yields should equal ___.
Municipal bond interest rate sensitivity is usually ___ that of Treasuries.

Answer 14

Treasury yields X (1-investor’s tax rate).
Lower than

Question 15

Sometimes, after-tax yield on a corporate bond is similar or a little higher than on a tax-free municipal bond. The ___ should be purchased because the default rate of ___ has been far less than the default rate for ___.

Answer 15

Tax-free bonds; municipal bonds; corporate bonds

Question 16

The historical default rate for municipal bonds is ___ than ___ corporate bonds.
Tax increases tend to ___ prices of municipal bonds, while tax cuts ___ the value of municipal bonds at least in theory.

Answer 16

80 times lower; A-rated
Increase; reduce

Question 17

Direct investment aka direct investment (FDI) refers to an investment in ___
It is unclear what relevance this would have to people considering investment in ___

Answer 17

a foreign business enterprise designed to acquire a controlling interest in the enterprise.
Individual bonds, much less bond funds

Question 18

Private activity bonds are secured by payments by a ___; ___ bonds fall
into this category.
Private activity bonds may be subject to ___ and they’ve become much more ___ in the past 25 years.

Answer 18

Private user; industrial development
the Alternative Minimum Tax & rare

Question 19

49 of 50 states are required to balance their budget with the exception of ___

Answer 19

Vermont

Question 20

Some municipalities will not rate their bonds or notes because …
1) they don’t want to ___
2) they know they will not receive ___
3) they’ve already demonstrated a history of ___ payments and high levels of ___. Basically these municipalities ___ the rating because their reputation precedes them.

Answer 20

1) pay the fee
2) a high rating
3) timely; collateral security; don’t need