FC CH 2 Flashcards
What types of bonds may a speculative investor seek?
Lower rated or junk bonds
The U.S. Treasury reimburses the _______ for a portion of the interest paid on BABs.
The U.S. Treasury reimburses the issuer for a portion of the interest paid on BABs.
Assuming a net revenue pledge bond, what is the first priority according to the flow of funds?
Operating and Maintenance Fund
What are Auction Rate Securities (ARS)?
Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction
True or False: Municipal bonds are exempt from all aspects of the Securities Act of 1933.
False. Municipal bonds remain subject to the anti-fraud provisions of the Act.
What types of bonds are issued to finance water, sewer, and electrical plants?
Utility revenue bonds
Local general obligation bonds are backed by what type of tax?
Property tax (e.g., school district bonds)
$9 million gross revenue, $3 million oper./maint. expenses, and $2 million debt service. Debt service coverage ratio?
($9 million - $3 million) ÷ $2 million = 3:1 coverage.
Bonds that are supported by tolls on bridges and highways are referred to as ______________ bonds.
Bonds that are supported by tolls on bridges and highways are referred to as transportation bonds.
What is a lease financing agreement that is issued in the form of a municipal revenue bond considered?
A lease financing agreement that is issued in the form of a revenue bond is a certificate of participation (COP).
What is a Tax Anticipation Note (TAN)?
Municipal note issued in anticipation of future real estate taxes
Debt that is issued by a municipality is referred to as ______ debt.
Debt that is issued by a municipality is referred to as direct debt.
Offering special rates to groups for the use of a revenue facility violates the __________________ covenant.
Offering special rates to groups for the use of a revenue facility violates the non-discrimination covenant.
An increase in expenses may result in an increase in user fees under the ____ covenant of the bond indenture.
An increase in expenses may result in an increase in user fees under the rate covenant of the bond indenture.
Given a yield change, ____________ bonds move more in price.
Given a yield change, long-term bonds move more in price (lower coupon or longer duration are also correct.)
Overlapping debt may also be referred to as ___________ debt.
Overlapping debt may also be referred to as coterminous debt.
True or False: A higher the assessed value of an owner’s property, the greater the benefit the owner will receive.
True
What is a Bond Anticipation Note (BAN)?
Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond
A negative population trend would have the greatest impact on a __________________ bond.
A negative population trend would have the greatest impact on a general obligation bond.
Bonds rated ___________ and higher are considered investment grade.
Bonds rated BBB (for S&P and Fitch) or Baa (for Moody’s) and higher are considered investment grade.
True or False: A revenue bond is normally subject to debt limitations
False
True or False: The interest rate reset periods on Auction Rate Securities range from 7, to 28, or 35 days.
True
Standard & Poor’s four ratings for municipal notes are ______, ______, ______, ______.
Standard & Poor’s four ratings for municipal notes are SP-1+, SP-1, SP-2, SP-3.
Moody’s and S&P rate the likelihood of an issuer _____________ on the debt service.
Moody’s and S&P rate the likelihood of an issuer defaulting on the debt service
If a letter of credit is used as backing for a municipal issue, what information must be disclosed?
The name of the bank that issued the letter of credit
True or False: An investor who is interested in income and safety of principal should buy a BB rated muni bond.
False. A bond with a BB rating is considered speculative and is inappropriate for a person with an objective of safety.
For a special assessment bond, will the credit rating increase or decrease due to rising property values?
Increase. Higher property values lead to more revenue (i.e., taxes) for the issuer.
In a revenue financing, the property being used is protected by the _________ covenant.
In a revenue financing, the property being used is protected by the insurance covenant.
Bonds that are issued to raise funds for a 501(c)(3) organization are issued by the _______ issuer.
Bonds that are issued to raise funds for a 501©(3) organization are issued by the conduit issuer
Who subsidizes the interest payments on BABs?
The U.S. Treasury pays a 35% direct subsidy to the issuer to offset borrowing costs
A bond that is secured by any amount of tax that is necessary to satisfy the commitment is a/an _____________ bond .
A bond that is secured by any amount of tax that is necessary to satisfy the commitment is a/an unlimited tax bond .
True or False: The Flow of Funds covenant on a revenue bond describes the priority for distributing project revenue.
True
What bond would be issued to build a facility for a private company?
Industrial Development Revenue (IDR) bond
A ____________ bond is issued to build a facility that is leased to another user.
A lease rental bond is issued to build a facility that is leased to another user.
A bond that is backed by the maximum tax that may be imposed is a ___________ bond .
A bond that is backed by the maximum tax that may be imposed is a limited tax bond.
_________ pay for bonds to be rated.
Issuers pay for bonds to be rated.
What is a municipal indenture or bond resolution?
The contract between the issuer and the bondholders
A municipality which fails to properly budget its retirement obligations has ________________ liabilities.
A municipality which fails to properly budget its retirement obligations has unfunded pension liabilities.
Which bond would most likely require a feasibility study to be issued?
Revenue Bond
What is another name for property tax?
Ad valorem tax
If an issuer refinances its bonds at a lower rate, its debt service coverage ratio will ________.
If an issuer refinances its bonds at a lower rate, its debt service coverage ratio will increase.
Assuming a net revenue pledge bond, what is the second priority according to the flow of funds?
Debt Service (with Operating and Maintenance first)
What taxes are normally used to support special tax bonds?
Taxes on gasoline, alcohol, and tobacco
Define parity bond.
A parity bond is when two or more issues that have the same lien against pledged revenues.
If an issuer refinances its bonds at a lower rate, what is the likely impact to its debt service coverage ratio?
If all other details remain unchanged, the debt service coverage ratio will increase.
True or False: Revenue bonds may only be issued with voter approval.
False
True or False: An increase in uncollected taxes is a positive sign of the municipality’s creditworthiness.
False
How often will VRDOs adjust their interest rate?
Specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.
MIG stands for ___________________________.
MIG stands for Moody’s Investment Grade.
True or False: A decrease in Medicaid or Medicare reimbursements is a positive factor for a hospital revenue bond.
False. Decreasing Medicare reimbursements will lead to a decrease in a hospital’s revenue.
By what types of taxes are state general obligation bonds backed?
Income, sales, or gasoline tax, but also licensing fees and fines.
Moody’s rates municipal notes using ______, ______, ______, ______.
Moody’s rates municipal notes using MIG1, MIG2, MIG3, SG.
How is property tax calculated?
Assessed value x millage rate
How does S&P and Moody’s further differentiate their ratings?
S&P uses + or - , while Moody’s uses 1, 2, 3.
__________ powers require a law to be passed before a bond may be issued.
Statutory powers require a law to be passed before a bond may be issued.
What type of indenture allows for additional bonds to be issued that are backed by the same facility?
An open-end indenture
How does the Dutch Auction set the interest rate on Auction Rate Securities?
It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).
For what reasons may an issuer’s debt service coverage ratio increase?
If the issuer’s revenue increases, its operating and maintenance expenses decrease, or its debt service decreases
True or False: A special tax bond is a type of revenue bond.
True
What is a Construction Loan Note (CLN)?
Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing
What are health care bonds issued to build?
Nonprofit hospitals and health care facilities
Tolls and user fees are typically used to support ________ bonds.
Tolls and user fees are typically used to support revenue bonds.
What two sources are used to pay debt service on a double-barreled bond?
Revenue dollars and tax dollars
What is the benefit to an issuer of municipal bonds?
The ability to raise capital by issuing bonds that pay a lower interest rate
True or False: Constitutional powers require a law to be passed before bonds may be issued.
False
What is the highest credit rating?
AAA for S&P and Fitch, and Aaa for Moody’s
How is the debt service paid on a special assessment bond?
It is paid based on the value of the benefit that is received or on the valuation of the property.
Bonds rated BB (Ba) or lower are considered _______________________ bonds.
Bonds rated BB (Ba) or lower are considered speculative or junk bonds.
True or False: A certificate of participation (COP) may be issued without a public vote.
True
What’s stated in a municipal indenture (bond resolution)?
Issuer’s responsibilities, bondholders’ rights, and the different covenants (pledges) made to protect bondholders
When is a municipality able to issue a lease rental bond?
If it uses the proceeds to purchase computers and uses an annual appropriation to pay the debt service.
By what are industrial development bonds backed?
The corporation that is leasing the facility
Define overlapping debt.
Debt of a municipality that is shared with another political entity (e.g., school district debt)
A bond supported by charges on only those who benefit from an improvement are referred to as _________________ bonds.
A bond supported by charges on only those who benefit from an improvement are referred to as special assessment bonds.
BABs pay interest which is _________ to the investor.
BABs pay interest which is taxable to the investor.
True or False: 501(c)(3) organizations issue bonds.
False
True or False: An increase in unfunded pension liabilities is a negative sign of the municipality’s creditworthiness.
True
True or False: An increase in assessed valuation is a positive sign of the municipality’s creditworthiness.
True
What is not included in net direct debt?
Self-supporting debt
True or False: The higher the assessed value of an owner’s property, the greater the assessment for the owner.
True
True or False: A closed-end indenture does not allow additional bonds to be issued that are backed by the same facility.
True
What is a Grant Anticipation Note (GAN)?
Municipal note issued in anticipation of receiving government funding in the form of a grant
True or False: If revenue falls short, payments on moral obligation bonds only begin with legislative approval.
True
Revenue bonds are backed by ___________________ generated by ________________________.
Revenue bonds are backed by specific revenue (user fees) generated by a project or facility.
In what covenant does the issuer pledge to keep the project in good working order?
Maintenance and Operation Covenant
Bonds that are secured by the repayment of student loans are referred to as _________ bonds.
Bonds that are secured by the repayment of student loans are referred to as education bonds.
What is a Revenue Anticipation Note (RAN)?
Municipal note that will eventually be paid from future federal or state subsidies
What does 1 mill equal?
$1.00 per thousand dollars of assessed value (.001 as a decimal)
List other names used for a bond indenture.
The trust indenture or bond resolution
The risk that an issuer may default on its bond issue is referred to as ______ risk.
The risk that an issuer may default on its bond issue is referred to as credit risk.
True or False: Lease rental bonds may be used to finance the purchase of telecommunications equipment.
True. However, the municipality is must be buying the equipment for use by its employees.
