Final Exam 3

Question 1

If the fed funds rate is steadily rising, it indicates that the Federal Reserve is

Answer 1

tightening credit

Question 2

basis points vs. bond point

Answer 2

For bonds, every 1 point represents 100 basis points. Therefore, one basis point is equal to .01%, or 1/100th of 1%. (15244)

Question 3

The U.S. Treasury normally looks to increase the length of the average maturity of its outstanding debt when

Answer 3

interest rates are expected to rise. In doing so, the Treasury would need to engage in fewer refunding programs, would reduce the sensitivity of the interest portion of its debt service to current interest rates, as well as reduce the cost of financing its debt. Should interest rates be falling, the U.S. Treasury would be more inclined to issue short-term debt.

Question 4

State and Local Government Series (SLGS) securities

Answer 4

State and Local Government Series (SLGS) securities are special securities issued by the Treasury Department to state and local government entities (municipalities) upon request to assist them in complying with federal tax laws and Internal Revenue Service arbitrage regulations when they have cash proceeds to invest from their issuance of tax-exempt bonds.

Question 5

A Direct Pay Build America Bond may be used to raise capital for

Answer 5

the same purposes as regular tax-exempt municipal debt except for refundings, working capital, private activity bonds, and 501(c)(3) borrowers. (66803)

Question 6

Rising inflation will tend to:

Answer 6

Rising inflation tends to have a negative impact on the bond market. When there is rising inflation, bond investors look to trade out of fixed-income investments, whose returns will be eroded by rising consumer prices. This selling pressure negatively affects bond prices in the market.

Question 7

When interest rates fluctuate, the price of the lower coupon bond i

Answer 7

is more volatile, or price-sensitive, than the price of the higher coupon bond.

Question 8

A special tax bond is a

Answer 8

revenue bond that is backed by a tax on a specific or designated source. Voter approval is not required and examples include sales taxes, gasoline taxes, or tobacco taxes, or hotel or tourist taxes. The issuer is not pledging taxes received from the municipality’s general fund

Question 9

If interest rates are expected to rise, for bonds trading at a premium which has the worst capital risk?

Answer 9

for bonds trading at a premium, the one with the greatest amount of capital risk is the bond with the longest time to maturity.

Question 10

The coverage for revenue bonds is a ratio that

Answer 10

is used to determine a municipality’s ability to pay the annual debt service on its outstanding debt. Most issuers use a net revenue pledge which is calculated using the following formula:
Net Revenues
Debt Service

Question 11

securities purchased are advance-refunded and the issue has an explicitly reserved call feature, which of the following would describe the proper disclosure on a customer confirmation

Answer 11

If securities purchased are advance-refunded and the issue has an explicitly reserved call feature, the proper disclosure on a customer confirmation would be escrowed to the call date.

Question 12

If securities purchased are advance-refunded and the issue has been called the disclosure

Answer 12

If the securities are called, the proper disclosure would be prerefunded and the date of the call and amount of the call price must be disclosed.

Question 13

If securities purchased are advance-refunded and the issue has only a sinking fund call, disclosure

Answer 13

the proper disclosure on a customer confirmation would be escrowed to maturity. If the sinking fund is operable, the securities must also be described as callable.

Question 14

When a buyer and seller execute a trade in a municipal security and the settlement date is later than a regular-way trade, they are using:

Answer 14

When the buyer and seller have agreed in advance to make delivery on a date that’s later than regular-way settlement (T + 2), it’s referred to as extended or delayed settlement.

Question 15

A forward delivery is a form of delivery

Answer 15

in which the security is priced based on a future settlement date.

Question 16

Any money due on a close-out transaction is required to be forwarded to the appropriate party within:

Answer 16

Five business days of the date of execution of the close-out notice

Question 17

The most important factors in determining the price of a bond are the

Answer 17

The coupon, maturity, and yield.

When the coupons and yields are similar, maturity is the prime factor. The shorter the maturity, the higher the pric

Question 18

A VRDO is a

Answer 18

municipal instrument that allows the holder to sell the bond back to the issuer, usually one time per year, at par plus accrued interest. The interest rate is periodically changed to reflect market conditions. To ensure that funds will be available to pay bondholders putting bonds back to the issuer, VRDOs are backed by a letter of credit. Therefore, they are not considered general obligation securities.

Question 19

A Municipal Fund Securities Limited Principal (Series 51)

Answer 19

may approve the account if the customer planned to invest solely in municipal fund securities (529 Plans).

Question 20

Time of trade disclosures

Answer 20

must be made regardless of whether the trade is solicited or unsolicited, or if the trade is made in the primary or secondary market. In addition, the disclosure must be made available publicly through established industry resources such as the MSRB’s Electronic Municipal Market Access

Question 21

In the contraction phase of the business cycle you would tend to find

Answer 21

During a period of contraction, or recession, as it is often referred to, you would see an attempt by the Federal Reserve to make money easier. This would mean one would find interest rates decreasing and the Federal Reserve following a buying policy. The demand for goods would be decreasing and the general rate of inflation would begin to slow down.

Question 22

The bidding restrictions would be found in

Answer 22

The bidding restrictions would be found in

Question 23

In order to increase investment spending by businesses, the FRB would

Answer 23

Investment spending by businesses would tend to occur if the FRB is pursuing an easy money policy. If the FRB wanted to make money easy (more available), it would take action to inject money into the banking system by buying securities, which would increase bank reserves and the money supply. This would tend to reduce the overall level of interest rate

Question 24

A strengthening of the U.S dollar against foreign currencies will have which of the following effects

Answer 24

A strengthening or increase of the dollar against foreign currencies will make U.S. exports less competitive with foreign exports. The U.S. dollar will be worth more in relation to foreign currencies. This will result in foreigners being required to spend a relatively higher amount of their currency to purchase U.S. products,

Question 25

When reporting trades that are executed away from the current market price or qualify as an exception to the 15-minute reporting requirement must use

Answer 25

a Special Condition Indicator which identifies the fundamentals of the trade. Trades that are done away from the current market price still must be reported within 15 minutes.

Question 26

bonds remain unsold in a divided account, the syndicate manager will:

Answer 26

In a divided (Western) account, each member is responsible to sell its portion of the issue. If it were an undivided (Eastern) account, In a divided (Western) account, each member is responsible to sell its portion of the issue. If it were an undivided (Eastern) account, choice (c) would be correct

Question 27

The net interest cost is found by

Answer 27

calculating the total interest paid over the life of the offering, plus any discount or less any premium the issuer was paid, divided by the bond year dollar amount. To find the number of bond years, multiply the number of bonds ($1,000 units) within each maturity by the number of years to maturity. The total interest paid is found by multiplying the number of bond years by the annual interest for each maturity.

Question 28

The net interest cost is found by calculating the total interest paid over the life of the offering, plus any discount or less any premium the issuer was paid, divided by the bond year dollar amount. To find the number of bond years, multiply the number of bonds ($1,000 units) within each maturity by the number of years to maturity. The total interest paid is found by multiplying the number of bond years by the annual interest for each maturity.

Answer 28

40,000 Bonds x 15 = 600,000 Bond Years x $30 = $18,000,000 Total Interest Paid

This bid is being made at $990, a 1% discount from par. This discount ($40,000,000 x .01 = $400,000) would be an additional cost to the issuer at maturity and would be added to the interest paid. $18,000,000 Interest Paid + $400,000 Additional Cost = $18,400,000 Total Interest Cost.

Bond Year Dollar Amount = 600,000 x $1,000 = $600,000,000

Net Interest Cost = $18,400,000 Total Interest Cost / $600,000,000 Bond Year Dollar Amount = 3.07%

Question 29

The Bond Buyer Revenue Bond Index is:

Answer 29

The Bond Buyer Revenue Bond Index (commonly referred to as the Revdex) is an index of the yields on 25 revenue bonds. It is compiled on a weekly basis by The Bond Buyer and contains 30-year maturity bonds with an average rating of S&P A+ and Moody’s A1.

Question 30

MIl tax value percentage

Answer 30

be careful it the tax says it’s only on a percentage of the home value