Municipal Bonds Flashcards
Serial Bonds
Bonds with different maturity dates, quoted on a Yield-to-Maturity (YTM) Basis
Term Bonds
Bonds that come due at the same time, quoted on a price (usually % of par)
All municipal securities trade…?
Over the counter (OTC)
Minimum Spread when trading bonds
1/8 of 1 Bond Point = $1.25 ($10/8)
1 Bond Point = $?
$10
If bonds are trading at a premium, the bond is quoted at…?
Yield-to-Call (YTC)
Interest rate is also known as …?
Coupon or Nominal Yield
How often do bonds pay out?
Semiannual
Dated Date
Date the bond starts to accrue for the next time frame
Legal Opinion
Bond counsel (usually a firm, not an individual)
What does the Legal Opinion consist of?
Legislative authority, federal tax exemption, exemption from ‘33 Act (provision of an Official Statement)
What types of Legal Opinions are there?
Qualified with reservations, Unqualified without reservations, Ex-Legal (Muni Bond trading w/o Legal Opinion)
What are the different types of Municipal Bonds?
General Obligation (GO) and Revenue
What ratings are “investment grade”?
AAA, AA, A, BBB
What ratings are not “investment grade”?
Anything below BBB
What are the different kinds of debt involved in GO Bonds?
Overlapping Debt, Coterminus (two taxing agencies share geographic boundaries, able to issue debt separately)
What is a Collection Ratio?
Specific to GO Bonds - ratio of how much of taxes are current vs how much of taxes are not current
What gap is favorable when assessing GO Bonds?
Gap between assessed valuation and full estimated value
What is a Feasability Study?
Specific to Revenue Bonds -
What is a Trust Indenture?
Specific to Revenue Bonds - written covenant/promise between the issuer and the trustee FBO the bondholders
Which expenses within the Flow of Funds hold priority?
Operations and Maintenance (assume NET revenue pledge)
What is an Open End Bond?
A type of Revenue Bond - continuously issues as long as the bond meets qualification of the Additional Bonds Test
What is a key factor within the Additional Bonds Test when assessing an Open End Bond?
Debt Service Coverage Ratio
What is a Closed End Bond?
A type of Revenue Bond - only issues new bonds to make the facility operational
… is considered insurance for the timely payment of interest and principal if an issuer defaults.
Credit Enhancement
What does Credit Enhancement cover? What does it NOT cover?
Credit Enhancement covers the timely payment of interest and principal. It does NOT insure the Secondary Price
GO Bonds: Limited Tax Bonds vs Unlimited Tax Bonds
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)
What are Municipal Money Market Securities, and what kinds are there?
High Quality debt maturing in less than a year: TANs, GANs, TRANs, BANs, RANs
Tax Anticipation Notes (TANs)
ST securities issued by Muni Bond issuers to finance projects when funds are not available - governments repay using tax revenue
Grant Anticipation Notes (GANs)
ST securities issued by Muni Bond issuers to finance in anticipation of receiving a grant
Tax and Revenue Anticipation Notes (TRANs)
A combination of TANs and RANs
Bond Anticipation Notes (BANs)
ST securities issued by Muni Bond issuers in advance of a larger future bond issue
Revenue Anticipation Notes (RANs)
ST securities issued by Muni Bond issuers that are repaid using revenue the project generates
Special Tax Bonds
Taxed bonds on special items such as gas or alcohol
Moral Obligation Bonds
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
Double Barreled Bonds
Consists of two promises: 1) User Fee, 2) Full faith and credit of the municipality
What kind of risks that come with Municipal Bonds?
Call Risk comes with a declining interest rate environment. Municipalities are more likely to call (buy back) bonds in a declining interest rate environment.
Industrial Development Bonds
Private Activity bonds that are taxable; two common types: Industrial Development Agency (IDA) and Industrial Development Revenue (IDR)
Which kind of bonds are not subject to Call Risk?
Zero Coupon Bonds and US Treasury Bonds
Call Protection
Two important factors: Time and Price
What type of calls can be made by municipalities?
Partial calls (done by lottery or randomly)
Sinking Funds
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
Catastrophe Call
May be contained in the Trust Indenture: Need not be disclosed. A call that is conducted under extreme situations (ie natural disaster)
Call Provisions are advantageous to the issuer in a…
Declining interest rate environment
Bonds without a Call Provision will be issued with a…
Higher Price (Premium) and Lower Yield
Put or Tender Options for bonds are advantageous to the issuer in a…
Rising interest rate environment
Prerefunding
Sell new bonds to call old bonds when they pass the [call] protection period
Old bonds that have been prerefunded have to be quoted on a…
YTC basis
UPC
Uniform Practice Code: Standardizes practices and secondary market (so that everyone agrees that everything will act the same way)
Settlement for Municipal Bonds…
Trade Date (T) + 2
The buyer of the Municipal Bond owes the seller…
The dollar amount of accrued interest calculated from dated date up to (but not including) settlement date
Municipal Securities calendar consists of
30 days/month, 360 days/year (30/360)
If you buy a Municipal Bond at a premium, you must do…
A straight amortization downward (decretion)
True or False: Longer term Bonds are less volatile than Short term Bonds
False
True or False: Lower coupon bonds are more volatile than Higher coupon bonds
True
Tax Equivalent Yield/Tax-Free Equivalent
Taxable Yield * (100% - tax bracket) = Tax-Free Equivalent
Tax-Free Equivalent/(100% - tax bracket) = Taxable Yield
True or False: Capital gains on Municipal Bonds are taxable
True
What is the only component of a Municipal Bond that is tax-free?
The coupon
Current Yield
Pay / Cost = Current Yield
Annual Interest / Current Market Price = Current Yield
Basis Point
10 cents
0.50% = 50 bps or 50 basis points
Bonds in default…
Trade Flat
Suitability: What are the tax implications of Municipal Bonds?
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)
