Debt: Municipal Debt Flashcards
Debt: Municipal Debt
MUNICIPAL DEBT CHARACTERISTICS
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-Municipal Bonds
1) how are they taxed 2) Municipalities issue long term debt or short-term notes 3) Municipal issues what 4 types of Bonds/notes
- Book-entry
4) New issued or older bonds that have not matured go through book-entry 5) are certificates issued 6) where is ownership record kept
1) federal is exempt, state you’ll not pay if the municipality is in your state 2) both
3) -obligation bonds
- revenue bonds
- special types of bonds
- short-term notes
4) new 5) no 6) on transfer agents books
Debt: Municipal Debt
MUNICIPAL DEBT CHARACTERISTICS
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-Legal Opinion / Bond Counsel
1) Legal Opinion is printed where 2) what does the bond counsel do 3) bond counsel legal opinion “qualifies” vs. “unqualified” meaning?
- Serial Bonds
4) tend to be of what duration 5)serial meaning 6) how do Par and interest work 6.1) how are short term notes different
1) in front of bond 2) examines the issue to make sure that it is legally binding on the issuer, is valid, and that the interest is exempt from federal tax under current law 3) unqualified everylthing is A-OK, qualifies, there is a legal uncertainty of which purchaser should be aware
4) long 5) maturities spread over a sequence of years 6) issued at par and interest is paid semiannual 6.1) either issued at a discount from par and mature at par value or they are issued at par and mature at par plus accrued interest.
Debt: Municipal Debt MUNICIPAL DEBT CHARACTERISTICS ------------------------------------------------------------------- -Level Debt Service 1) meaning for municipality budget
1) is a fixed annual budget on how much they have to pay for all bonds outstanding, similar to a homeowners mortgage payment
Debt: Municipal Debt
GENERAL OBLIGATION BONDS
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-Overview
1)A general obligation bond is backed by 2)Local governments have the ability to collect property taxes this is called 2.1)Therefore, local governmental issues are usually backed by
- Limited Tax Bonds
3) what is “limited” taxing power 4) the issue that could face issuer 5)have more or less credit risk than unlimited tax bonds 6) sell at higher/ lower interest rates.
1) full faith, credit, and taxing power of the issuer 2)”ad valorem” taxes 2.1)”unlimited” ad valorem taxes. This means that the issuer promises to raise taxes without any limit in order to pay off the bondholders.
3) can only tax citizens up to a certain amount, the limit placed on the rate that the issuer uses to assess taxes. 4) if at the top of what they can tax public, they will not be able to get more funds to cover bond interest and principal to investors 5) more 6) higher
Debt: Municipal Debt
GENERAL OBLIGATION BONDS
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-Mill Rate
1) Ad Valorem taxes are based on what 2) One mill = 2.) example, solve municipality has a tax rate of 6 mills, the property was assessed value of $100k, how much would the property owner pay
- The backing of state vs. local issue
3) state issues are backed by what 4) how about a local issue
1) Municipalities “millage” 2) 1/10th of 1 percent or .001 2.1) .06 X $100k= $600 [$1 tax on every $1k assessed value]
3) income and sales taxes., they do not assess property taxes 4) backed by property taxes
Debt: Municipal Debt
GENERAL OBLIGATION BONDS
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-Constitutional Debt Limit
1) municipalities have a limit they can increase property taxes [limit is % of assessed value], if they are at limit what can’t they do 2) The only way to change the limit 3) are there also Debt limits are also imposed by state constitutions on G.O
- Capital Appreciation Bond
4) muni with what type of coupon 5)A conventional zero-coupon G.O. bond is counted against an issuer’s debt limit at 5.1) so the benefit to the discount is
1) cant issue additional bonds 2)majority approval in a public referendum vote. 3) yes
4) zero 5) par value because the discount is treated as “principal. 5.1) debt limit is the discounted principal amount and the discount earned is considered to be interest income [using discount allows them to issue more debt compared to higher par value]
Debt: Municipal Debt
GENERAL OBLIGATION BONDS
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-G.O. Holders Have Legal Right To Compel Tax, Levy
1)In the event of a default, G.O. bondholders have the right to do what 1.1) because of this, are G.O. bonds are generally considered the safest type of municipal credit 2)actual rating of each issuer vary?
- Parity Bonds
3) one that has an equal claim on tax collections or revenues as other obligations of that issuer? 3.1) example municipality has a debt limit of $500 million, with $300 million of general obligation bonds outstanding and wants to issue $100 million of general obligation bonds
1) compel a tax levy or legislative appropriation to make a payment on the debt 1.1) yes 2) yes
3) true 3.1) these bonds have the same claim on tax collections as the prior issue [as long as under $500k], thus both issues are on parity with each other and are called parity bonds
Debt: Municipal Debt
REVENUE BONDS
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-Overview
1)backed by 2) allow bondholders to compel taxation or legislative appropriation for payment like a general obligation? 3) backed by full faith and credit of issuer?
- Feasibility Study
4) prior to issue, a feasibility study is prepared by who 5) what are they trying to do
1) self-supporting deb, paid by revenues from the operation of the project, user fees, rents, grants, excise, and other non-ad Valorem taxes.
2) Now] 3) no, just revenue of the project 4) outside consultants, who do not have a vested interest in seeing the facility built 5) determine if the revenue bond makes sense
Debt: Municipal Debt
REVENUE BONDS
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-Trust Indenture
1) because revenue bonds are backed by a single source of funds, do they have greater credit risk than G.O. bonds 1.1) as a result they trade at a higher or lower yield 2)since there is no ability for an investor to collect if the project fails [unlike GO bonds] investors look for revenue bonds that have what 4) A trust indenture is a legal requirement for corporate issues under the Trust Indenture Act of 1939? 5) the uses of a “Trust Indenture” optional for revenue and GO muni bonds 6) why do revenue bonds typically have a trust indenture 7) what does the trustee do to help investors
1) yes 2) higher yields 3) issued under a “Trust Indenture 4) yes 5) yes 6) hard to sell without, investors are looking for protection 7) monitors the issuer’s compliance with bond contracts and the terms of the contract
Debt: Municipal Debt
REVENUE BONDS
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-Bond Contract
1) prepared by who 2) Every bond contract has an “authorizing resolution” (bond resolution) which allows? 3) Each contract has a “security agreement” which allows what 4) and most revenue bond contracts have a
1) the bond counsel 2) ability to sell the bond 3) pledging an income source to back the issue, 4)Trust Indenture
Debt: Municipal Debt
SPECIAL TYPES OF MUNICIPAL DEBT
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General-
1) Special types [non-GO and revenue bonds] make up what % of all muni bonds 1.1) what is the split for GO and revenue
- Special Tax
2) secured by 3) does tax source need to relate to the type of project - Special Assessment
4) benefit all or some 5) example 6) who pays for the assessment
1) 10% 1.1) both are 45%= 90%
2) tax other than an ad valorem tax, usually excise taxes such as cigarette, liquor, and gasoline taxes 3) no
4) improvement that benefits only a small portion of the general public 5) new street lights in a specific area 6) only thoset that benefit
Debt: Municipal Debt
SPECIAL TYPES OF MUNICIPAL DEBT
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-Moral Obligation Bonds
1) legal obligation of the issuer to pay 2) why a promise to pay 3) only issued when 4) high or low level of credit risk 5) example of a moral obligation 6) if not enough revenue is brought in, who will step in [but not required]
- Double-Barreled
7) backed by 8) bonds secured by any two sources? 9)treated as a G.O. bond, and why
1) no 2) Assume an issuer is at or above its statutory debt limit and cannot legally issue more debt backed by taxing power. 3)issued in times of distress of the issuer 4) high 5) revenue bonds to build stadiums 6) state, any deficiency in pledge revenues will be included in the budget of the state legislature
7) revenue, but also backed by faith, credit, and taxing power [GO pledge] of municipal issuer 8) no 9) yes, the ultimate source of payment is taxing power
Debt: Municipal Debt
SPECIAL TYPES OF MUNICIPAL DEBT
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-Certificate Of Participation (COP)
1) issued when the issuer has reached its maxed debt limit, why? 1.1) to get around this, COP was created? 2) allows state entities to issue tax-exempt security that pledges what 3) an example of a COP 4) The lease payment is made based on the governing body doing what 5) is it a G.O. bond? 6) is the annual appropriation typically made, why
1) yes, hard to get voter approval to increase the limits so that more bonds could be issued. 1.1) yes 2) the revenue (lease payments received) from a project 3) college dorm 4) making an annual appropriation from tax collections 5) no, governing body is not “legally” obligated to make the annual appropriation 6) yes, otherwise the issuer’s credit rating would be destroyed
Debt: Municipal Debt
SPECIAL TYPES OF MUNICIPAL DEBT
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-Lease Rental
1) used to finance what 2) how are investors paid [where does the money come from]
- Industrial Development Bond
3) issued by who and for what 4)how are investors paid [where does the money come from] 5) interest income taxable 6) guaranteed by who 7)considered the user’s liability or the issuer’s.
1) construction of an office used by a state or city agency 2) rents paid
3) state, city, or local agency to build an industrial facility that is leased to a private company 4) lease payment 5) yes 6) private user 7) user’s liability
Debt: Municipal Debt
SPECIAL TYPES OF MUNICIPAL DEBT
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-BABs - Build America Bonds
1) congress passed what to make this an option [tax and spend] 2) is this act still available, idea behind it 3) taxable to investors 4) municipality got a 35% [issued at 10%, they would pay 6.5% intrest] interest rate credit from who 5) because they were taxable income to investors municipalities could sell them where 6) bonds could be used for any capital project [infrastructure improvements] that would normally be financed with a tax-free bond issue. 7) bonds were only used for projects that would normally be funded with tax-free bonds?
1)American Recovery and Reinvestment Act 2) no, was a stimulus program to encourage capital investment 3) yes 4)federal government 5) broader taxable market [larger market] 6) true 7) true
