Fixed Income Overview Flashcards
coupons quoted
as a percentage of par
Bond priced above par (premium) quoted
quoted at yield to earliest call
Bond Priced below par (Discount) quoted
Priced to latest call. This is because if it’s called sooner you made the money back sooner.
Treasury Settlement
t+1
Treasury interest rate time period
365 day
interest due calc munis
(Days held / 360) * annual interest amount
Bank Examinations
Banks are examined every 2 years
Brokers Broker taking positions
A brokers broker transacts they don’t take/hold positions
Typical Face amount of a muni
5K
As a bond approaches maturity the price will
Pull to Par
Offering circular
Prepared by
prepared by broker to disseminate info to clients.
balloon maturity
A serial offering with a disproportionately larger part of the bond principal repaid prior to final maturity.
Series of Bonds
Staggered offering to raise funds as needed. can be different bond types
Ratings when the issuer and insurer have different ratings
If the insurer of an offering has rating Aaa but the issuer has a Ba rating the issue would get the Aaa rating.
Refunded issues are typically invested in
SLGS (Slugs)
defeased
when the escrow account is fully funded the issue is defeased meaning it no longer counts towards the issuer’s debt ceiling and any associated collateral is released.
sequestration
forced budget cuts that could lead to a call of outstanding bonds.
Margin & Expense deductions for munis
Individuals
You can not deduct the expenses or interest for loans used to acquire the bonds.
Margin & Expense deductions for munis
Banks
Banks can purchase up to 10 million face using margin/loans and deduct up to 80% of the interest cost on the margin loan.
Bond Councils Legal Opinion
Unqualifed vs. Qualified
Unqualified is favorable it means the council thinks interest will be free from federal taxes. A qualified opinion means they can’t guarantee it.
Washington D.C. Bonds
Not a state and is subject to state taxation
municipal interest vs. capital gains
Taxation
Capital gains due to buying low and selling high are taxable
Coterminous vs. overlapping
Coterminous refers to 2 or more taxing agencies that share the same boundaries and issue debt separately.. overlapping debt is two taxing agencies taxing the same property or service. states don’t have coterminous debt
Development Revenue Bonds
used to construct facilities or purchase equipment that is then leased to a corporation. May be taxable and subject to AMT.
Lease rental bonds
To develop office space buildings for a municipality not a private entity
COP
FORM Of lease revenue bond but not tax exempt because the payment is tied to annual appropriations.
Mortgage Revenue bond
backed by a stream of mortgage payments.
Default on a moral obligation bond vs. GO bond
If a GO bond fails holders can sue to compel a tax be levied to pay off the bonds. If an MO bond fails it’s a revenue bond and they can’t sue to compel the state to levy taxes.
Municipal Note Maturity
Time Frames
typically less than 12 months but can range from 3 months to 3 years.
Tax Exempt Commercial Paper issuance
use
time frames
often used in place of Bans or Tans issued up to 270 days but typically has a 30, 60 or 90 day maturity.
VRDO LIquidity Provider
To support tender rights a letter of credit or standby bond purchase agreement will be arranged by the issuer with a bank. The bank is called the liquidity provider.
Call Provisions of ARS
They can be called by the issuer on any interest payment date but have no put features.
Put Bonds
these are floating or variable rate bonds with the right for the bondholder to buy at par at some time interval.
Pre-refunding
vs,
Advance Refunding
Pre-refunding means refunded to first call
Advance Refunding mean to maturity..
Rating of refunded bonds
They get the rating of the securities in the escrow account.
Escrow account CArrying Cost
Interest earned on the escrow account goes towards the interest on the newly issued bond.\
Negative Carry - doesn’t cover all the interest
Positive Carry - exceeds the interest on the new bond which could trigger arbitrage issues.
current refunding
If the issuance of the replacement bonds is within 90 days of the older bonds being matured or called.
Market Price Rule
Securities purchased in the open market to fund an escrow account must be purchased at fair market value. Paying more to reduce the yield on the securities in the escrow account would be considered yield burning.
Yield Burning
The sale of Treasury securities to a municipal issuer that will be placed in escrow at above-market prices thereby reducing the yield on those securities to avoid arbitrage regulations. Illegal.
BAB’s taxability
They are taxable but but may have a tax credit.
Tax Credit BAB
Holder gets a tax credit of 35% of the interest paid.
Direct Pay BAB’s
No credit to bondholder but the municipal issuer get a 35% credit on taxes paid.
CAB issue size
increments of 5,000. accreted interest is considered compound interest not OID discount so it is taxable.
PRicing of Variable Rate Bonds
the interest rate is regularly reset to reflect the market
This causes the price of these bonds to stay near par and therefor the relatively stable price is the main benefit.
if issuing notes what would even out cash flow for taxes
TAN’s because taxes are received at specific notes issuing tans in anticipation of the lump payments evens out the cash flow.
Additional Bond TEst
found in the bond contract requires tests to ensure adequate revenue before additional bonds can be issued against the pledged revenue.
trust indenture/bonds indenture
agreement between issuer and a trustee to enforce resolution
bond resolution
set forth duties of the issuer and rights of bondholders.
Offering Circular or Memorandum
For muni’s offered on a limited basis like when a dealer batches a large block of previously issued bonds in the secondary market the dealer would prepare an offering circular or memorandum.
Municipal Fund Securities
Exemptions
Municipal Fund Securities are considered municipa securities and exempt for Most of the 1933 & 1940 act.
- registering with the SEC
- preparing a prospectus and statem of additional information SAI.
- daily calculation of NAV
- establishing a board of directors
Types of municipal fund securities
local government investment pools LGIPS’s
Section 529 plans
section 529A plans (ABLE)
Administration of LGIP’s
generally a states department of Treasury
Goals of LGIP’s
safety of principal
daily liquidity
return of investment
they are like a money market
Breaking the Buck
describes the share price in short term liquid debt security pools dropping below $1.00 target par value.
LGIP Participation
Generally it’s restricted to specific government unit types.
LGIP vs. Money Market liquidity
LGIP’s are exempt from SEC rule 2a-7 which attempts to ensure the liquidity of money markets.
LGIP Investing
Most LGIP’s provide for pool investments directly through LGIP personnel. A limited # of LGIP’s may allow purchase through a Broker-dealer
rule G45 INVESTMENT fund reporting
information relating to an LGIP offer must be reported no later than 60 days following the end of each semi-annual reporting period on June 30 and December 31.
Most LGIPS invest in government backed securities
????
No - may include govt. backed securities but is not limited to them.
Prepaid Tuition Plans
Not considered municipal funds and not under MSRB rules.
529 Plan and owners estate
529 plans are generally not included in the estate
Prepaid tuition programs and investment risk
Because they are generally guaranteed to grow at a rate equal to college tuition increases contributors bear no investment or inflation risk.
Types of Prepaid tuition plans
- Prepaid unit plans
* contract plans
