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Series 7 > Municipal Bonds > Flashcards

Municipal Bonds Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Serial Bonds

A

Bonds with different maturity dates, quoted on a Yield-to-Maturity (YTM) Basis

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2
Q

Term Bonds

A

Bonds that come due at the same time, quoted on a price (usually % of par)

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3
Q

All municipal securities trade…?

A

Over the counter (OTC)

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4
Q

Minimum Spread when trading bonds

A

1/8 of 1 Bond Point = $1.25 ($10/8)

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5
Q

1 Bond Point = $?

A

$10

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6
Q

If bonds are trading at a premium, the bond is quoted at…?

A

Yield-to-Call (YTC)

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7
Q

Interest rate is also known as …?

A

Coupon or Nominal Yield

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8
Q

How often do bonds pay out?

A

Semiannual

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9
Q

Dated Date

A

Date the bond starts to accrue for the next time frame

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10
Q

Legal Opinion

A

Bond counsel (usually a firm, not an individual)

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11
Q

What does the Legal Opinion consist of?

A

Legislative authority, federal tax exemption, exemption from ‘33 Act (provision of an Official Statement)

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12
Q

What types of Legal Opinions are there?

A

Qualified with reservations, Unqualified without reservations, Ex-Legal (Muni Bond trading w/o Legal Opinion)

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13
Q

What are the different types of Municipal Bonds?

A

General Obligation (GO) and Revenue

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14
Q

What ratings are “investment grade”?

A

AAA, AA, A, BBB

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15
Q

What ratings are not “investment grade”?

A

Anything below BBB

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16
Q

What are the different kinds of debt involved in GO Bonds?

A

Overlapping Debt, Coterminus (two taxing agencies share geographic boundaries, able to issue debt separately)

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17
Q

What is a Collection Ratio?

A

Specific to GO Bonds - ratio of how much of taxes are current vs how much of taxes are not current

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18
Q

What gap is favorable when assessing GO Bonds?

A

Gap between assessed valuation and full estimated value

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19
Q

What is a Feasability Study?

A

Specific to Revenue Bonds -

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20
Q

What is a Trust Indenture?

A

Specific to Revenue Bonds - written covenant/promise between the issuer and the trustee FBO the bondholders

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21
Q

Which expenses within the Flow of Funds hold priority?

A

Operations and Maintenance (assume NET revenue pledge)

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22
Q

What is an Open End Bond?

A

A type of Revenue Bond - continuously issues as long as the bond meets qualification of the Additional Bonds Test

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23
Q

What is a key factor within the Additional Bonds Test when assessing an Open End Bond?

A

Debt Service Coverage Ratio

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24
Q

What is a Closed End Bond?

A

A type of Revenue Bond - only issues new bonds to make the facility operational

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25
Q

… is considered insurance for the timely payment of interest and principal if an issuer defaults.

A

Credit Enhancement

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26
Q

What does Credit Enhancement cover? What does it NOT cover?

A

Credit Enhancement covers the timely payment of interest and principal. It does NOT insure the Secondary Price

27
Q

GO Bonds: Limited Tax Bonds vs Unlimited Tax Bonds

A

Limited Tax Bond - only going to charge fixed number of taxes
Unlimited Tax Bonds - we will charge whatever is necessary to pay back bonds (subject to fluctuations)

28
Q

What are Municipal Money Market Securities, and what kinds are there?

A

High Quality debt maturing in less than a year: TANs, GANs, TRANs, BANs, RANs

29
Q

Tax Anticipation Notes (TANs)

A

ST securities issued by Muni Bond issuers to finance projects when funds are not available - governments repay using tax revenue

30
Q

Grant Anticipation Notes (GANs)

A

ST securities issued by Muni Bond issuers to finance in anticipation of receiving a grant

31
Q

Tax and Revenue Anticipation Notes (TRANs)

A

A combination of TANs and RANs

32
Q

Bond Anticipation Notes (BANs)

A

ST securities issued by Muni Bond issuers in advance of a larger future bond issue

33
Q

Revenue Anticipation Notes (RANs)

A

ST securities issued by Muni Bond issuers that are repaid using revenue the project generates

34
Q

Special Tax Bonds

A

Taxed bonds on special items such as gas or alcohol

35
Q

Moral Obligation Bonds

A

The state is morally obligated to pay back the bond; Legislative Apportionment: where the members of the Legal Opinion take a vote on whether to pay back the bond

36
Q

Double Barreled Bonds

A

Consists of two promises: 1) User Fee, 2) Full faith and credit of the municipality

36
Q

What kind of risks that come with Municipal Bonds?

A

Call Risk comes with a declining interest rate environment. Municipalities are more likely to call (buy back) bonds in a declining interest rate environment.

36
Q

Industrial Development Bonds

A

Private Activity bonds that are taxable; two common types: Industrial Development Agency (IDA) and Industrial Development Revenue (IDR)

36
Q

Which kind of bonds are not subject to Call Risk?

A

Zero Coupon Bonds and US Treasury Bonds

36
Q

Call Protection

A

Two important factors: Time and Price

37
Q

What type of calls can be made by municipalities?

A

Partial calls (done by lottery or randomly)

37
Q

Sinking Funds

A

A fund that puts aside money that is needed to pay for a bond - usually has better credit quality than a bond without a sinking fund

37
Q

Catastrophe Call

A

May be contained in the Trust Indenture: Need not be disclosed. A call that is conducted under extreme situations (ie natural disaster)

38
Q

Call Provisions are advantageous to the issuer in a…

A

Declining interest rate environment

39
Q

Bonds without a Call Provision will be issued with a…

A

Higher Price (Premium) and Lower Yield

40
Q

Put or Tender Options for bonds are advantageous to the issuer in a…

A

Rising interest rate environment

41
Q

Prerefunding

A

Sell new bonds to call old bonds when they pass the [call] protection period

42
Q

Old bonds that have been prerefunded have to be quoted on a…

A

YTC basis

43
Q

UPC

A

Uniform Practice Code: Standardizes practices and secondary market (so that everyone agrees that everything will act the same way)

44
Q

Settlement for Municipal Bonds…

A

Trade Date (T) + 2

45
Q

The buyer of the Municipal Bond owes the seller…

A

The dollar amount of accrued interest calculated from dated date up to (but not including) settlement date

46
Q

Municipal Securities calendar consists of

A

30 days/month, 360 days/year (30/360)

47
Q

If you buy a Municipal Bond at a premium, you must do…

A

A straight amortization downward (decretion)

48
Q

True or False: Longer term Bonds are less volatile than Short term Bonds

A

False

49
Q

True or False: Lower coupon bonds are more volatile than Higher coupon bonds

A

True

50
Q

Tax Equivalent Yield/Tax-Free Equivalent

A

Taxable Yield * (100% - tax bracket) = Tax-Free Equivalent
Tax-Free Equivalent/(100% - tax bracket) = Taxable Yield

51
Q

True or False: Capital gains on Municipal Bonds are taxable

A

True

52
Q

What is the only component of a Municipal Bond that is tax-free?

A

The coupon

53
Q

Current Yield

A

Pay / Cost = Current Yield
Annual Interest / Current Market Price = Current Yield

54
Q

Basis Point

A

10 cents
0.50% = 50 bps or 50 basis points

55
Q

Bonds in default…

A

Trade Flat

56
Q

Suitability: What are the tax implications of Municipal Bonds?

A

If you are buying same-state residency bonds, you are local, state, and federally tax-exempt (triple tax free)
If you are buying different-state residency bonds, you are only federally tax-exempt (need to pay local and state tax)

57
Q
A

Series 7 (8 decks)

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