FC CH 2

Question 1

What types of bonds may a speculative investor seek?

Answer 1

Lower rated or junk bonds

Question 2

The U.S. Treasury reimburses the _______ for a portion of the interest paid on BABs.

Answer 2

The U.S. Treasury reimburses the issuer for a portion of the interest paid on BABs.

Question 3

Assuming a net revenue pledge bond, what is the first priority according to the flow of funds?

Answer 3

Operating and Maintenance Fund

Question 4

What are Auction Rate Securities (ARS)?

Answer 4

Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction

Question 5

True or False: Municipal bonds are exempt from all aspects of the Securities Act of 1933.

Answer 5

False. Municipal bonds remain subject to the anti-fraud provisions of the Act.

Question 6

What types of bonds are issued to finance water, sewer, and electrical plants?

Answer 6

Utility revenue bonds

Question 7

Local general obligation bonds are backed by what type of tax?

Answer 7

Property tax (e.g., school district bonds)

Question 8

$9 million gross revenue, $3 million oper./maint. expenses, and $2 million debt service. Debt service coverage ratio?

Answer 8

($9 million - $3 million) ÷ $2 million = 3:1 coverage.

Question 9

Bonds that are supported by tolls on bridges and highways are referred to as ______________ bonds.

Answer 9

Bonds that are supported by tolls on bridges and highways are referred to as transportation bonds.

Question 10

What is a lease financing agreement that is issued in the form of a municipal revenue bond considered?

Answer 10

A lease financing agreement that is issued in the form of a revenue bond is a certificate of participation (COP).

Question 11

What is a Tax Anticipation Note (TAN)?

Answer 11

Municipal note issued in anticipation of future real estate taxes

Question 12

Debt that is issued by a municipality is referred to as ______ debt.

Answer 12

Debt that is issued by a municipality is referred to as direct debt.

Question 13

Offering special rates to groups for the use of a revenue facility violates the __________________ covenant.

Answer 13

Offering special rates to groups for the use of a revenue facility violates the non-discrimination covenant.

Question 14

An increase in expenses may result in an increase in user fees under the ____ covenant of the bond indenture.

Answer 14

An increase in expenses may result in an increase in user fees under the rate covenant of the bond indenture.

Question 15

Given a yield change, ____________ bonds move more in price.

Answer 15

Given a yield change, long-term bonds move more in price (lower coupon or longer duration are also correct.)

Question 16

Overlapping debt may also be referred to as ___________ debt.

Answer 16

Overlapping debt may also be referred to as coterminous debt.

Question 17

True or False: A higher the assessed value of an owner’s property, the greater the benefit the owner will receive.

Answer 17

True

Question 18

What is a Bond Anticipation Note (BAN)?

Answer 18

Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond

Question 19

A negative population trend would have the greatest impact on a __________________ bond.

Answer 19

A negative population trend would have the greatest impact on a general obligation bond.

Question 20

Bonds rated ___________ and higher are considered investment grade.

Answer 20

Bonds rated BBB (for S&P and Fitch) or Baa (for Moody’s) and higher are considered investment grade.

Question 21

True or False: A revenue bond is normally subject to debt limitations

Answer 21

False

Question 22

True or False: The interest rate reset periods on Auction Rate Securities range from 7, to 28, or 35 days.

Answer 22

True

Question 23

Standard & Poor’s four ratings for municipal notes are ______, ______, ______, ______.

Answer 23

Standard & Poor’s four ratings for municipal notes are SP-1+, SP-1, SP-2, SP-3.

Question 24

Moody’s and S&P rate the likelihood of an issuer _____________ on the debt service.

Answer 24

Moody’s and S&P rate the likelihood of an issuer defaulting on the debt service

Question 25

If a letter of credit is used as backing for a municipal issue, what information must be disclosed?

Answer 25

The name of the bank that issued the letter of credit

Question 26

True or False: An investor who is interested in income and safety of principal should buy a BB rated muni bond.

Answer 26

False. A bond with a BB rating is considered speculative and is inappropriate for a person with an objective of safety.

Question 27

For a special assessment bond, will the credit rating increase or decrease due to rising property values?

Answer 27

Increase. Higher property values lead to more revenue (i.e., taxes) for the issuer.

Question 28

In a revenue financing, the property being used is protected by the _________ covenant.

Answer 28

In a revenue financing, the property being used is protected by the insurance covenant.

Question 29

Bonds that are issued to raise funds for a 501(c)(3) organization are issued by the _______ issuer.

Answer 29

Bonds that are issued to raise funds for a 501©(3) organization are issued by the conduit issuer

Question 30

Who subsidizes the interest payments on BABs?

Answer 30

The U.S. Treasury pays a 35% direct subsidy to the issuer to offset borrowing costs

Question 31

A bond that is secured by any amount of tax that is necessary to satisfy the commitment is a/an _____________ bond .

Answer 31

A bond that is secured by any amount of tax that is necessary to satisfy the commitment is a/an unlimited tax bond .

Question 32

True or False: The Flow of Funds covenant on a revenue bond describes the priority for distributing project revenue.

Answer 32

True

Question 33

What bond would be issued to build a facility for a private company?

Answer 33

Industrial Development Revenue (IDR) bond

Question 34

A ____________ bond is issued to build a facility that is leased to another user.

Answer 34

A lease rental bond is issued to build a facility that is leased to another user.

Question 35

A bond that is backed by the maximum tax that may be imposed is a ___________ bond .

Answer 35

A bond that is backed by the maximum tax that may be imposed is a limited tax bond.

Question 36

_________ pay for bonds to be rated.

Answer 36

Issuers pay for bonds to be rated.

Question 37

What is a municipal indenture or bond resolution?

Answer 37

The contract between the issuer and the bondholders

Question 38

A municipality which fails to properly budget its retirement obligations has ________________ liabilities.

Answer 38

A municipality which fails to properly budget its retirement obligations has unfunded pension liabilities.

Question 39

Which bond would most likely require a feasibility study to be issued?

Answer 39

Revenue Bond

Question 40

What is another name for property tax?

Answer 40

Ad valorem tax

Question 41

If an issuer refinances its bonds at a lower rate, its debt service coverage ratio will ________.

Answer 41

If an issuer refinances its bonds at a lower rate, its debt service coverage ratio will increase.

Question 42

Assuming a net revenue pledge bond, what is the second priority according to the flow of funds?

Answer 42

Debt Service (with Operating and Maintenance first)

Question 43

What taxes are normally used to support special tax bonds?

Answer 43

Taxes on gasoline, alcohol, and tobacco

Question 44

Define parity bond.

Answer 44

A parity bond is when two or more issues that have the same lien against pledged revenues.

Question 45

If an issuer refinances its bonds at a lower rate, what is the likely impact to its debt service coverage ratio?

Answer 45

If all other details remain unchanged, the debt service coverage ratio will increase.

Question 46

True or False: Revenue bonds may only be issued with voter approval.

Answer 46

False

Question 47

True or False: An increase in uncollected taxes is a positive sign of the municipality’s creditworthiness.

Answer 47

False

Question 48

How often will VRDOs adjust their interest rate?

Answer 48

Specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.

Question 49

MIG stands for ___________________________.

Answer 49

MIG stands for Moody’s Investment Grade.

Question 50

True or False: A decrease in Medicaid or Medicare reimbursements is a positive factor for a hospital revenue bond.

Answer 50

False. Decreasing Medicare reimbursements will lead to a decrease in a hospital's revenue.

Question 51

By what types of taxes are state general obligation bonds backed?

Answer 51

Income, sales, or gasoline tax, but also licensing fees and fines.

Question 52

Moody’s rates municipal notes using ______, ______, ______, ______.

Answer 52

Moody’s rates municipal notes using MIG1, MIG2, MIG3, SG.

Question 53

How is property tax calculated?

Answer 53

Assessed value x millage rate

Question 54

How does S&P and Moody’s further differentiate their ratings?

Answer 54

S&P uses + or - , while Moody’s uses 1, 2, 3.

Question 55

__________ powers require a law to be passed before a bond may be issued.

Answer 55

Statutory powers require a law to be passed before a bond may be issued.

Question 56

What type of indenture allows for additional bonds to be issued that are backed by the same facility?

Answer 56

An open-end indenture

Question 57

How does the Dutch Auction set the interest rate on Auction Rate Securities?

Answer 57

It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).

Question 58

For what reasons may an issuer's debt service coverage ratio increase?

Answer 58

If the issuer's revenue increases, its operating and maintenance expenses decrease, or its debt service decreases

Question 59

True or False: A special tax bond is a type of revenue bond.

Answer 59

True

Question 60

What is a Construction Loan Note (CLN)?

Answer 60

Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing

Question 61

What are health care bonds issued to build?

Answer 61

Nonprofit hospitals and health care facilities

Question 62

Tolls and user fees are typically used to support ________ bonds.

Answer 62

Tolls and user fees are typically used to support revenue bonds.

Question 63

What two sources are used to pay debt service on a double-barreled bond?

Answer 63

Revenue dollars and tax dollars

Question 64

What is the benefit to an issuer of municipal bonds?

Answer 64

The ability to raise capital by issuing bonds that pay a lower interest rate

Question 65

True or False: Constitutional powers require a law to be passed before bonds may be issued.

Answer 65

False

Question 66

What is the highest credit rating?

Answer 66

AAA for S&P and Fitch, and Aaa for Moody’s

Question 67

How is the debt service paid on a special assessment bond?

Answer 67

It is paid based on the value of the benefit that is received or on the valuation of the property.

Question 68

Bonds rated BB (Ba) or lower are considered _______________________ bonds.

Answer 68

Bonds rated BB (Ba) or lower are considered speculative or junk bonds.

Question 69

True or False: A certificate of participation (COP) may be issued without a public vote.

Answer 69

True

Question 70

What's stated in a municipal indenture (bond resolution)?

Answer 70

Issuer's responsibilities, bondholders' rights, and the different covenants (pledges) made to protect bondholders

Question 71

When is a municipality able to issue a lease rental bond?

Answer 71

If it uses the proceeds to purchase computers and uses an annual appropriation to pay the debt service.

Question 72

By what are industrial development bonds backed?

Answer 72

The corporation that is leasing the facility

Question 73

Define overlapping debt.

Answer 73

Debt of a municipality that is shared with another political entity (e.g., school district debt)

Question 74

A bond supported by charges on only those who benefit from an improvement are referred to as _________________ bonds.

Answer 74

A bond supported by charges on only those who benefit from an improvement are referred to as special assessment bonds.

Question 75

BABs pay interest which is _________ to the investor.

Answer 75

BABs pay interest which is taxable to the investor.

Question 76

True or False: 501(c)(3) organizations issue bonds.

Answer 76

False

Question 77

True or False: An increase in unfunded pension liabilities is a negative sign of the municipality’s creditworthiness.

Answer 77

True

Question 78

True or False: An increase in assessed valuation is a positive sign of the municipality’s creditworthiness.

Answer 78

True

Question 79

What is not included in net direct debt?

Answer 79

Self-supporting debt

Question 80

True or False: The higher the assessed value of an owner's property, the greater the assessment for the owner.

Answer 80

True

Question 81

True or False: A closed-end indenture does not allow additional bonds to be issued that are backed by the same facility.

Answer 81

True

Question 82

What is a Grant Anticipation Note (GAN)?

Answer 82

Municipal note issued in anticipation of receiving government funding in the form of a grant

Question 83

True or False: If revenue falls short, payments on moral obligation bonds only begin with legislative approval.

Answer 83

True

Question 84

Revenue bonds are backed by ___________________ generated by ________________________.

Answer 84

Revenue bonds are backed by specific revenue (user fees) generated by a project or facility.

Question 85

In what covenant does the issuer pledge to keep the project in good working order?

Answer 85

Maintenance and Operation Covenant

Question 86

Bonds that are secured by the repayment of student loans are referred to as _________ bonds.

Answer 86

Bonds that are secured by the repayment of student loans are referred to as education bonds.

Question 87

What is a Revenue Anticipation Note (RAN)?

Answer 87

Municipal note that will eventually be paid from future federal or state subsidies

Question 88

What does 1 mill equal?

Answer 88

$1.00 per thousand dollars of assessed value (.001 as a decimal)

Question 89

List other names used for a bond indenture.

Answer 89

The trust indenture or bond resolution

Question 90

The risk that an issuer may default on its bond issue is referred to as ______ risk.

Answer 90

The risk that an issuer may default on its bond issue is referred to as credit risk.

Question 91

True or False: Lease rental bonds may be used to finance the purchase of telecommunications equipment.

Answer 91

True. However, the municipality is must be buying the equipment for use by its employees.