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Series 7 > Muni Bond Tax > Flashcards

Muni Bond Tax Flashcards

0
Q

Federal income tax is

A

Interest is free from federal income tax, based on reciprocal immunity which applies to US Supreme Court

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1
Q

Interest is paid

A

Semi annually

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2
Q

State income tax

A

Most states exempt muni interest on bonds issued within the state. Taxes usually apply on out-of-state bonds
One exception is commonwealth of Puerto Rico

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3
Q

Interest on Puerto Rico bonds is

A

Exempt from all fed state an local taxes

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4
Q

Corporate equivalent yield

A

Interest on corp bonds is fully taxable, without evaluating taxation differences corp are more appealing due to higher yields or coupon

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5
Q

Corporate equivalent yield formula:

A

Municipal yield/(100%-investors tax rate) = taxable corp equivalent yield

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6
Q

Current yield on muni bond formula

A

Current yield = annual interest/mkt px

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7
Q

Muni bond premiums

A

Not like corp bond premiums/ bonds purchased above par. For tax purposes, premiums must be amortized over the life of the bond, results in a reduced cost basis

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8
Q

When muni bonds is purchased at a premium Held to maturity

Sold prior to Maurity

A

No tax consequences, premium fully Amoritized

Reduce cost basis by the amount that has been amortized(written off)

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9
Q

Premiums on corp bonds may either be

A

Amortized over the life of the bond or taken as a loss in full maturity

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10
Q

Muni discount

A

OID, if you buy bond at a discount at the original offering, discount treated as interest income not cap gain, works in the investors favor interest income is tax free

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11
Q

Secondary market discount

A

If you buy a bond at a discount in the 2nd market, discount is treated as ordinary income -fully taxable

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12
Q

Municipal bonds trading at a discount are always more:

A

Volatile because they are more sensitive to interest rate changes than bonds trading at premium

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13
Q

SWAPS

A

Exchange for one bond for another bond, investor looking to offset capital gains in their equity portfolios to avoid tax consequences, also sell and reinvest. Take capital loss by selling these bonds at a loss

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14
Q

SWAPS allow an investor to:

A

Upgrade a portfolio by switching into a higher rated bond
Extend or shorten time to maturity
Increase income or yield interest
Realize cap loss for tax purposes

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15
Q

Accrued interest is_____that you trade any type of bond, or ______never do a SWAP

A

Never never, accrued interest is always the result of trading a bond, it shouldn’t be the reason that you trade a bond

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16
Q

Who is large buyers of muni bonds?

A

Individuals, commercial banks, insurance companies. Because of the tax exempt status of the bond interest.

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17
Q

Who does not benefit from tax exempt status of muni bonds since they are taxed free

A

Charitable institutions, IRAs and pension funds

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18
Q

Blue List

A

Was a daily listing of municipal bonds for sale by dealers who had positions or inventories in various municipal issues, 2nd market

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19
Q

Contents of blue list

A 
Amount of bond available 
Name of bond and issuing authority 
Coupon rate 
Maturity date
Yield or price
Name of the dealer offering the bond
Purpose of the bond
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20
Q
  1. Blue list does not contain:
  2. Blue list total is:
  3. Inventory listings:
A
  1. Bonds quality rating
  2. Market indicator total par value
  3. Bondtrac and bond express
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21
Q

The bond buyer:

A

Newspaper of new issues

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22
Q

Placement ratio

A

Been there done that, new %tage of new issues that have been sold each week

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23
Q

30 day visible supply

A

Total # of new issues coming to mkt in next 30 days, good indicator of the expected supply in the new issue mkt

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24
Q

Issues of municipal______are _____included in the 30-day visible supply

A

Notes, not

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25
Q

Bond buyer index

A

Index of 20 GO bonds with 20yr maturities , new issues bonds as a percentage of total new issue volume for the week

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26
Q

Bond buyers revenue bond index

A

Avg yield of 25 specific revenue bonds each with 30 year maturities

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27
Q

Moody’s

A

Reference Manuel about outstanding bond issues, coupon rates, maturities, call provisions, and ratings

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28
Q

Standard and Poors repository

A

Info center for collecting data on munis

29
Q

Trends in muni market are determined by using

A

30 day visible supply
Bond buyer index
Blue list

30
Q

Underwriting/syndicate members

A

New issue, municipality will hire a broker-dealer to handle the distribution of new issue. Groups formed by BD are called underwriting syndicates.

31
Q

Managing underwriter:

A

Is the firm that serves as head of the syndicate group and determines the scale on a serial bond or the pricing on a term bond issue.

32
Q

Scale

A

Offering yields by maturity at which a new issue of bonds will be offered on a SERIAL Bond issue. With staggered maturity, 1st step determining bid

33
Q

Pricing

A

Represents the set price at which a new issue of bonds will be offered on a term bond issue, when the entire issue has the same maturity

34
Q

Negotiated deals

A

Municipality goes to a particular underwriter for help in bringing out a new issue of REVENUE BONDS

35
Q

Underwriting agreement

A

Describes the terms and interest costs for the offering which are negotiated directly bt the municipality and managing underwriter

36
Q

Competitve bidding

A

Municiplaity request sealed bids from underwriters or underwriting syndicates. Bonds awarded to group which offers lowest net interest cost

37
Q

Net interest cost

A

Is the amount of interest that the municipality will end up paying on the bond issues

38
Q

How to determine the NIC

A

Any premium over par that is received when the bond is sold is subtracted from the total interest cost

39
Q

Note:

A

Issuers are also interested in knowing the true interest cost because it considers the time value of money where as net interest cost does not

40
Q

The Official notice if sale(used with competitive bids

A

Municipalities invite bids to be made on proposed new issues by publishing a notice of sake in the newspaper
Bidding details
States accept seals bid at a certain time and place

41
Q

Municipal bonds are exempt from

A

SEC registration requirements, but the notice of sale is available from issuer, financial consultant or approving attorney

42
Q

The managing underwriter does not select

A

Bond counsels, it’s the state the county,

43
Q

Bid form

A

A document on which competitive bids are submitted to the issuer, notice of sale is included. When executed the bid form becomes the contract between the issuer and the underwriting syndicate

44
Q

Bid form includes

A

Coupon rates maturities, and signature on behalf of submitting dealer. It does not include legal opinions

45
Q

Remember that a BID FORM is used for _________underwritings and an Underwriting agreement is used for __________underwritings

A

Bid form, competitive and negotiated

46
Q

The issuer determines the ______and the _______determines the spread, YTM, and net interest cost

A

Maturity; underwriter

47
Q

The manager of the managing underwriter is best described as?

A

The dealer that directs all of the underwriting groups activities. Determine the size of each members participation in underwriting

48
Q

In a competitive bid, the manager…

A

BEFORE submitting a bid, will send to each member a syndicate letter: describes agreement BT the manager and each syndicate member

49
Q

Prior to submitting a bid

A

I will send a syndicate letter

Allows firms to opt in or opt out of the underwriting

50
Q

Eastern agreement

A

Most often used for municipal offerings , also called an undivided acct(are undivided as to everything): bond allocation, financial responsibility and financial liability

51
Q

Western agreement

A

Are called divided accts, responsibility considered “severally, but not jointly”

52
Q

Determining the price

A

After the syndicate studies the terms of the bond issue given In Official Notice of Sale and it will decide on how much to bid on the bonds based upon what it thinks is a competitive price

53
Q

The price of a new issue bond is….

A

Determined on Bond Buyer Wksheets by underwriter

54
Q

Allocation procedures

A

Once awarded to a syndicate, the managing underwriter determines the specific allocation but must follow this general order

55
Q

Allocations procedure, syndicate Letter outlined:

A 
Pre-sale 
Group Net Acct or Syndicate group acct
Designated orders
Members orders at take down
(Pretty Girls Demand More)
56
Q

Allocations must….

A

Be disclosed to customers upon request

57
Q

Take down and concession

A

Each member of the syndicate will buy bonds from the syndicate manager at the offering price less a take down

58
Q

Concession

A

If a muni dealer is not a syndicate member of, they buy the bonds from the syndicate at the offering price less a concession

59
Q

Any remaining profit above the take down

A

(Residual profit) will be split among the syndicate members after the managers’ expenses have been met

60
Q

When offering offering new bonds:

A

Syndicate will sell them on a “when, as, and if ISSUED” basis. Bonds still have to be printed by the printer, so several weeks before actual delivery takes place to buyers and syndicate members

61
Q

Odd first coupon

A

Covers more or less of 6 months of interest depending on issue date and the normal schedule of semi annual interest payment dates

62
Q

A short coupon

A long coupon

A

Less than 6 months

More than 6 months

63
Q

The official statement (OS)

A

Disclosure document, prospectus, that can be provided by the ISSUER(not required) similar to prospectus

64
Q

OS

A

Contains most detail financial information on a new issue of muni bonds

65
Q

If OS is PROVIDED by issuer,

A

It must be provided to all customers who purchase the bonds and upon request to other BD

66
Q

If an OS ISNT PROVIDED. By issuer,

A

The the BD would not be required to provide an OS to purchasers of the bond or other BD

67
Q

OS is exempt from

A

33 and 34 act

68
Q

The preliminary official statement

A

Must be delivered to a customer at the time of confirmation of the purchase if the final official statement is not yet available from issuer. Final version must be sent to the Customer when available

69
Q

The OS would include:

A

The purpose for the bond issue
Redemption provisions
Description of the issue

70
Q

And OS statements would not include

A

Taxable equivalent yields

71
Q

Private placement

A

Is the entire sale of a new issue of municipal bonds to one client or a group of accredited or sophisticated investors

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